As passive income ideas go, owning high-yield shares is one of the best.
I own a few FTSE 100 shares with juicy dividends that I expect to hold for many years to come. Two of them currently sell at what I see as cheap valuations. If I had spare money to invest today, I would buy more shares of both firms for my portfolio.
M&G
The investment fund company M&G (LSE: MNG) has a juicy dividend yield of 8.8%. Not only that, but its dividend strategy is to maintain or increase the payout annually. Dividends are never guaranteed, but the company did modestly raise its interim dividend this year. Last year also saw a raise at the full-year level.
But a high yield is only attractive to me if I think a company can and will continue to support it. Last year, M&G’s dividend of 18.3p per share dwarfed earnings per share of just 3.3p.
Possible bargain
So, will the dividend last? I certainly hope so. One of the risks of investing in an investment firm such as M&G is that as market returns move around, earnings can also rise or fall sharply.
Last year’s earnings of £92m mean M&G has a price-to-earnings (P/E) ratio of 63. That hardly screams dirt cheap value! But the year before, earnings topped £1bn. It was the same story the prior year too. Yet M&G’s market capitalisation is languishing below £5bn.
As an investor, what matters to me is what comes in future, not what has already happened. At the interim stage this year, performance was not encouraging. Assets under management and administration fell and the firm reported a post-tax loss of £1bn using the IFRS reporting standard.
But that reflects short-term portfolio valuation fluctuations, the risk I mentioned above. I remain confident that M&G’s underlying business is in fair shape. I think it can benefit in future thanks to strong client demand and a well-regarded brand.
British American Tobacco
The number of people smoking cigarettes has been declining in most markets for decades already. In the long term, that is an existential risk for the tobacco industry.
So why would be I be happy to add to my existing position in British American Tobacco (LSE: BATS)?
The company still sells vast numbers of cigarettes: it shifted over 300bn in the first half of last year. It also has pricing power thanks to owning premium brands such as Lucky Strike. That can help it mitigate falling volumes by pushing up prices. On top of that, British American Tobacco has been growing its non-cigarette business at a fast clip.
High-yield bargain
Added together, that explains why the company remains a free cash flow machine. It expects to generate a staggering £40bn of free cash flows before dividends over the next five years. That helps it fund a generous dividend, which has grown every year this century.
The current yield is 7.2%. One risk I see is the company’s high debt. Paying that down could eat into profitability.
But I think this business continues to offer my portfolio attractive income potential, for what I see as a cheap P/E ratio of just nine.
