Is the M&G dividend yield heading to 10%?

As the M&G dividend yield heads towards double digits, out writer explains why he is considering buying more of the shares.

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The appeal of dividend income has led me to buy some double-digit yielders over the years. That means that they pay me 10% or more of the purchase price each year in dividends. My focus is first on the quality of the business though: I never buy a share just because of its yield. Several years ago, the dividend yield for investment manager M&G (LSE: MNG) reached the mid teens in percentage terms. A rising share price has pushed it down since then. But could the M&G dividend yield hit 10% again?

Mounting market volatility

I think the answer to that question is yes, it could.

Already, the yield is a juicy 9.3%. So it is not that far off 10%. Meanwhile, market volatility has led to the M&G share price moving around like lots of other shares. Such volatility can affect M&G in more ways than one. It might push down the share price. But more broadly, it could make investors nervous and pay closer attention to their money.

For an investment manager like M&G, that might be good or bad news. If it is able to attract money that customers pull out of funds managed by other companies, then revenues and profits could increase. But my concern is that it will go the other way. With the lacklustre performance of some of its funds, I fear that investor nervousness could lead to an outflow of money from M&G.

Indeed that is a key risk for the company. Last year, assets under management increased 0.8% compared to the prior period. That is not the sort of growth to write home about — but it is still growth. The Institutional Asset Management division actually saw £6bn of client fund inflows. However, that was largely offset by a weaker performance in the Retail Asset Management division. Compared to a £6.6bn outflow for the whole firm the previous year, I feel the most recent performance was positive.

Dividend sustainability

That might not be enough to boost investor sentiment towards the M&G share price, though. The shares have lost 14% of their value in the past year. If they continue losing value, the M&G dividend yield will likely hit 10%. A falling share price saw the yield move into double figures for a period in early March.

I think that could happen again, if for example the company’s next results are weak. Another possible spur is investors souring further on the investment management sector in the face of a coming recession.

But that yield is backwards looking. Will M&G keep paying out at its current level?

Its stated policy is to maintain or raise the dividend annually. So far it has delivered on that policy, albeit the most recent increase of 0.4% was small. M&G has only been an independent listed company since 2019, so lacks a long track record. But if its business performance continues at the current level, I think it could afford to maintain or increase its dividend, in line with the policy.

My move on the M&G dividend yield

As the M&G dividend yield moves up, I find it increasingly attractive. I already think it is high and own M&G in my portfolio. But if the shares get cheaper – and the yield goes higher – I would consider buying more.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane owns shares in M&G. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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