Like a lot of people, I am happy to generate extra income without working more for it. One way I do that is by investing in FTSE 100 shares. I hope that at least some of these blue-chip names, like British American Tobacco, will help me earn extra income for no additional labour.
There is another FTSE 100 share I own that is set to pay me £965 in passive income next year if I put £10,000 into it today. Not only that, but I might earn the same amount every year that I hold the shares. Here is why that might happen – and what could stop it.
Attractive yield from FTSE 100 firm
The share in question is M&G (LSE: MNG). The company is a fund manager and benefits from a well-known brand. It was only split out of former parent company Prudential a few years ago, but M&G has been around in one form or another for a long time.
Right now, it has a dividend yield of 9.65%. That means that if I invest £100 in M&G shares, I ought to earn £9.65 in annual dividends. So £10,000 ought to earn me £965 a year.
That is an attractive yield to me. But why did I use the word “ought” to above?
How dividends work
Dividends are never guaranteed. M&G has a dividend policy of maintaining or increasing its annual dividend each year. In August, it raised its interim dividend by 1.6% in line with the policy.
But such a policy is simply an expression of what a company’s board of directors aspires to do. Sometimes, plans come up against reality and it is the reality that survives unscathed. Whether M&G — or any other company – delivers on its dividend policy in the long term ultimately depends on business performance. Monetary dividends take cash. So a company needs to generate excess cash if it is to fund them year after year.
Will the M&G dividend survive?
Like any firm, M&G faces risks to its future ability to pay a dividend at the current level.
Rocky financial markets could lead investors to withdraw funds, hurting profits. The company saw net client inflows in the first six months of this year (excluding its Heritage division). But before that, clients had been pulling funds out faster than putting them in. A recession could see such behaviour return, hurting revenues and profits.
On the other hand, the company has a strong customer base and well-recognised brand. As a long-term investor, I am optimistic that in coming years and decades, customer demand for asset management services will grow. That could boost revenues and profits. M&G has been buying back shares. It can therefore pay the same dividend per share as before without spending as much money.
I think the M&G dividend can survive. If it does, investing £10,000 into its shares today really could earn me £965 in annual passive income.
But diversification is important for investors like me to manage risks. If I had spare cash to invest now, and did not already own M&G shares, I would buy some for my portfolio. I will not be buying more — but I am looking forward to dividends from my existing holding.
