I would consider this losing FTSE 100 stock to target a second income of £19,000.

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

Looking at the UK stock market today, I see several ways to increase its strength. Investing in equity shares with a long-term perspective is one tried and tested method. But which stocks to choose?

High-performing stocks always look attractive because the companies in question are doing something right. However, it may be difficult to extract significant returns from an already overvalued stock.

I prefer to look for beaten-down stocks in companies with a long history of strong performance. Price declines are likely to be temporary, so holding certain stocks while they are cheap may equate to profitable returns in the future.

With that in mind, potential investors may want to consider this promising British insurance provider that has had a rough few months.

A bright future

Phoenix Group‘s (LSE: PHNX) is one of the UK’s largest long-term savings and retirement businesses. It specializes in life insurance, pensions, and asset management, with a focus on acquiring and managing closed-end life insurance and pension portfolios.

These books are policies that are no longer sold to new customers but are held to maturity, providing predictable cash flow.

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

Assignments

Not surprisingly, the dividend yield of 10.9% was the first thing that caught my attention. A high yield can equate to a good amount of regular income. But yields tend to move in direct opposition to price.

If I expect the price to recover, I should also expect the yield to go down. If you are calculating long-term returns, it is better to use a ratio. Phoenix appears to have maintained an average yield of about 7% over the past decade.

My calculations

Using the discounted cash flow model, Phoenix’s share price is estimated to be undervalued by 21.2%. Earnings are forecast to grow by 76% annually going forward, suggesting a recovery may be on the cards. If it were to grow at the same rate it did between 2010 and 2020, it would bring annual gains of 5% per year.

With those averages, the miracle of compounding returns means that a monthly investment of £300 can grow to £300,000 in 20 years (with those dividends reinvested). Given the average yield of 7% held, that pot would pay a second income of £19,000 a year in dividends.

A valid concern

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

Phoenix also invests in bonds and fixed income securities, so it faces credit risk if these assets default or are written down.

On the other hand, the group recently appointed a new CFO and implemented a share incentive program for employees. Overall, I like the way it’s going and think the low valuation makes it worth considering as part of an income portfolio.