As an income investor, I want my money to work hard. My funds sitting in cash are earning me very little, with the Bank of England base rate being 0.1%. With chatter around rates potentially turning negative later in the year, I want to ensure I’m earning a better yield. Currently, the FTSE 100 stock M&G (LSE:MNG) offers a dividend yield of 9.68% with the shares trading around 185p. This puts it easily in the top 10 highest dividend yields available within the FTSE 100 index. But would I buy?
Why is the dividend yield so high?
M&G is a leading UK based investment manager. It caters to both retail and institutional clients, through a wide range of savings and investment products. As such, it’s reliant on growing assets under management (AUM) as a key way to make money. This is because it earns fees and commissions from clients buying and selling mutual funds, structured products and from being a custodian.
For 2020, two dividends were paid out. The first was paid at the end of May, at 11.92p per share. The second at the end of September, of 6p per share. So a total of 17.92p of dividends, with a share price of 185p, gives a dividend yield of 9.68%. Looking ahead, M&G has set the end of April and end of September 2021 for the next two dividends. They’re currently marked as provisional and subject to change.
I need to be careful about assuming I’ll get this yield for 2021. This is because the yield figure of almost 10% is backward-looking, based on past figures. Until the figures for 2021 are announced, I don’t know what the yield will be. There’s no guarantee the dividend per share will remain the same this year. This is a risk I need to be aware of.
Yet if the dividend policy remains the same this year, then I could be netting a very healthy income stream from the FTSE 100 stock.
Is it sustainable?
Operating profit for the first half of 2020 came in at £339m, a big dive from the 2019 figure of £714m. This was driven primarily by the net outflow of £4.1bn over the period from savings and investments. But against this backdrop, the CEO talked of “our continued financial strength and resilient performance.”
From my point of view, if those results were seen as positive enough to pay out a dividend, then I think it could be reasonable to hope for a similar payout this year. I think the full-year 2020 results (due out March 9) could be promising. This is because the strong bounce-back in stock markets globally in the second half of last year leads me to conclude that M&G will see a net inflow for H2 2020. Further, a recent Bank of England report has shown that £125bn extra was put into savings accounts by Britons last year. I would imagine M&G will have benefited from this move too.
But as you can see, I’ve used words like ‘hope’ and ‘imagine’ here. None of my assumptions are guaranteed.
If M&G see a continued fall in AUM, the share price could fall. Even with a high dividend yield, this would offset my overall profit if I sold the share for a loss. But I hope increased inflows happened in H2, so dividend cover should be high enough to continue the high yield.
