I’m hoping to turn £5,000 into £250,000 by holding this FTSE passive income star with a 10% return

Passive income is a simple concept, but it can be difficult to fully understand. Imagine earning a second income without actively working for it? I won’t get that in the job market, but I can get it by investing in top FTSE 100 Income shares like Investments of the Phoenix Group (LSE:PHNX).

Once I invest my money, the dividends should flow into my trading account year after year without much effort on my part.

With any luck, this income will increase as Phoenix increases distributions to shareholders over time. By reinvesting my dividends, I acquire more shares, which in turn pay additional dividends, creating a virtuous cycle. The longer I stay invested, the more time my money has to grow.

I plan to hold Phoenix stock for decades

Although the concept is tempting, it also poses dangers. First, the capital I invest is at risk. If the company’s strategy falters or it struggles financially, the value of my shares could decline.

Second, dividends are not guaranteed. Companies need to generate enough cash to pay them, and that could be a challenge for Phoenix. The company’s trailing dividend yield is a staggering 10.5% and is expected to reach 11% in 2025. That’s more than double the highest yields for cash or bonds. But is it sustainable?

Phoenix manages life insurance, endowment insurance, term life insurance, pensions and pensions, investing more than £290 billion on behalf of 12 million customers. Include brands Standard life, Calm And SunLife (although outsourcing the latter is being considered).

The company has a strong track record of rewarding its shareholders and has increased payouts in eight of the last ten years.

Cash generation rose 5.8% to £950m in the first half of the current financial year. The board is targeting up to £1.5 billion for the full year. Still, it has been a difficult time for FTSE 100 financials since the pandemic. Phoenix’s share price has fallen 3.91% in the past year and 33.55% in five years, wiping out much of its dividend gains.

My dividends should add up and grow

With a price-to-earnings ratio of 15.35, the shares appear reasonably valued. But it’s not hard to imagine the company’s shares moving sideways again in 2025, for example if interest rates remain high or the UK economy struggles.

I’ve invested £5,000 in Phoenix and look forward to receiving juicy dividends next year, regardless of the share price’s performance.

Now let’s consider a hypothetical scenario where I hold my stocks for 30 years and the return stays at 11% (a big assumption, I know). If I reinvest each dividend, my £5,000 could be worth £114,461 at the end of this period.

That assumes the stock price doesn’t rise at all. If it increased at an average rate of 3% per year, my total return could reach a whopping £254,750. Not bad for an initial amount of £5,000.

Anything can happen over three decades, so I diversify my investments across 15-20 FTSE 100 stocks. Still, this calculation highlights the benefits of holding dividend stocks for the long term. I’m sticking with Phoenix and hoping I can grab that massive second income despite the ups and downs of stocks.