A cheap stock with a sky-high dividend can be enormously enticing. This is especially the case when markets are in a funk as they are now. Fortunately, I think I’ve found a great example of a cheap FTSE 100 dividend share that’s worth buying today.
Monster dividend yield
Based on the current consensus among analysts, insurer and asset manager M&G (LSE: MNG) offers a stonking forecast dividend yield of 8.9% for FY22. That’s one of the biggest in the FTSE 100. It’s also well over double the yield generated by the index as a whole.
Of course, the question that any dividend hunter has to ask is how sustainable the bi-annual payments actually are. On this front, I think investors can sleep safely (for now).
The FTSE 100 member’s recent set of full-year results were certainly well received. Although adjusted operating profit dipped from £788m to £721m, the firm was able to confirm that it hit all its commitments since demerging from giant Prudential.
These included total capital generation of £2.8bn in two years, “well ahead” of the £2.2bn target set for the end of 2022. On top of this, the company also hit its costs savings target of £145m one year ahead of schedule.
As a result of this, M&G announced it would be returning £500m back to holders via a share buyback. No wonder the share price jumped on the day.
I think this form could continue in 2022. Through a combination of acquisitions and product launches, the £5.5bn-cap is expanding its services in the UK and Europe. A resolution to the conflict in Ukraine and a full post-pandemic recovery could also see more savers’ money finding its way to the company.
Looking further ahead, M&G stands to benefit from an ageing population that’s realising how insufficient the State Pension might be for their desired lifestyle on retirement.
Risks to consider
Naturally, I’d be a complete fool (rather than a Fool) if I didn’t consider the potential risks here.
Unsurprisingly, there’s no guarantee that dividends will always be paid. The global pandemic, while a once-in-a-century event, showed us that the income stream is usually one of the first things to be sacrificed in an effort to shore up cash. As far as M&G is concerned, it’s worth mentioning that profit is expected to cover the FY22 payout just 1.1 times. That’s already rather low.
Away from the dividends, I would also need to be comfortable knowing that M&G’s share price performance will likely be heavily correlated with the health of the UK economy. That’s not necessarily an issue for long-term investors like myself. However, knowing that the stock is still 6% below where it stood when M&G was listed in 2019 is a sober reminder that my capital can fall as well as rise in value.
Cheap FTSE 100 stock
Of course, investors might argue that a lot of risks are already in the price. M&G shares change hands at just 10 times forecast earnings. That looks pretty reasonable to me. Yes, there are similar companies trading on even cheaper valuations in the UK market. However, the dividend stream isn’t quite so big.
Overall, I consider this a good candidate if I was looking to build a diversified, income-focused portfolio.