I’d consider this beaten FTSE 100 dividend share a £19,000 second income

Building a sustainable second stream of income is not exactly easy. If it were, everyone would be doing it! But it is certainly possible. It just takes some time, planning and dedication.

When I look at the UK stock market today, I see a number of ways in which I can maximize its potential. Investing in dividend stocks with a long-term view is a proven method. But which stocks should you choose?

The best-performing stocks always look attractive because the companies in question are clearly doing something right. However, it can be difficult to earn significant returns from a stock that is already highly valued.

I prefer to look for beaten-down stocks of companies with a long history of strong performance. The price drop is likely temporary, so grabbing some stocks while they’re cheap could yield lucrative returns in the future.

With that in mind, potential investors might want to consider this promising British insurer, which has had a difficult few months.

A bright future

Phoenix group‘s (LSE: PHNX) one of the UK’s largest long-term savings and pension companies. It specializes in life insurance, pensions and asset management and focuses mainly on acquiring and managing closed life insurance policies and pension portfolios.

These books are policies that are no longer sold to new customers, but are still managed to maturity, creating a predictable cash flow.

It also provides retirement solutions for individuals and businesses, helping customers manage long-term savings and retirement income. This sector is becoming increasingly important due to demographic changes and the aging of the UK population.

Dividends

It’s no surprise that the dividend yield of 10.9% was the first thing that caught my attention. Such a high return could equate to a decent amount of fixed income. But returns usually move in direct contrast to the price.

If I expect a price recovery, I can also expect interest rates to fall. When calculating long-term returns, it is better to use an average. Phoenix appears to have maintained an average return of around 7% over the past decade.

My calculations

Using a discounted cash flow According to the model, Phoenix’s share price is estimated to be undervalued by 21.2%. Earnings are expected to grow 76% per year going forward, suggesting a recovery may be on the way. If the economy were to grow at the same rate as between 2010 and 2020, it could deliver an annualized return of 5% per year.

With these averages, the miracle of compound returns means that a monthly investment of £300 can grow to £300,000 in twenty years (with dividends reinvested). Assuming an average return of 7%, that pot would pay out a second income of £19,000 per year in dividends.

Relevant concerns

It may be a good plan, but it is not without risk. Insurance companies are highly exposed to interest rate fluctuations, which affect the discount rates used to value their liabilities. That could hit earnings and hurt the share price

Phoenix also invests in bonds and fixed income securities, which exposes it to credit risk if these assets default or are downgraded.

On the plus side, the group recently appointed a new CFO and implemented an employee stock incentive plan. Overall, I’m happy with the direction it’s going and think its low valuation makes it worth considering as part of an income portfolio.