10% income a year! Here’s why I couldn’t resist the FTSE 100’s highest yield

I bought this high-yielding FTSE 100 stock last week to bag the highest possible income. Now I’m crossing my fingers and hoping it’s sustainable.

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The FTSE 100 is packed full of top dividend stocks offering some incredible yields and I simply can’t resist them.

Last week I took a chance, and bought the company offering the biggest yield of all. By doing so, I’ve bagged myself income of more than 11% a year, but I’ve also taken on board some risk. Was this wise?

My double-digit yield comes courtesy of asset manager M&G (LSE: MNG). The stock has been high on my shopping list for some time, and I finally took the plunge last Tuesday. 

Juicy income stream

High dividends are things of fragile beauty. They’re not always built to last. All too often, they are a sign of a company in trouble.

Yields are calculated by dividing the dividend per share by the share price. So if the dividend is 5p and the stock trades at £1, the yield is 5%. If the stock plummets to 50p, the yield automatically shoots up to 10%. If the share price crashed due to falling cash flows, the yield won’t last long.

M&G was offering a sky-high yield even before the recent FTSE 100 sell-off. It dipped 8% in the days before I took the plunge, which I also found hard to resist. Combined with that 11% plus yield, it seemed a brilliant entry point.

Measured over 12 months, M&G shares are down 18.89%. In fact, they’ve laboured since the company was hived off from Prudential in June 2019. Like I said: my purchase was not without risk.

Yet I have been impressed by management’s commitment to rewarding shareholders. The board returned almost £1bn in 2022, via £465m of dividends and a £503m share buyback.

Management shows progression

The dividend per share has climbed steadily, from 18.23p in 2020 to 18.30p in 2021, and 19.60p in 2022. Last year’s 7.1% increase looks even more impressive given that, at the time, the stock was already yielding a dizzying 9.2%.

As ever, there is no guarantee that the board can maintain its generosity. That requires more than good will, but also cold hard cash. Last year, capital generation tumbled from £1.87bn in 2021 to a loss of £397m. That would normally terrify me but this year is much more promising, with M&G looking to generate £2.5bn this year. Let’s hope it does.

The banking crisis is a worry, as are ongoing recession fears. If either triggers a stock market crash, the value of M&G’s assets under management and customer inflows will both fall, as will annual management fees. Its dividend might then follow suit and I’d feel like a chump. For reassurance, I remind myself that its shareholder Solvency II coverage ratio remains pretty solid at 199%.

Even if the dividend was slashed in half, the yield would still be around 5%, which isn’t the worse. I took a risk, but I think it’s a risk worth taking, especially since I plan to hold M&G for years, if not decades. With luck, the income will still be rolling in when I’m retired and need it.

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 assessed. Consider taking independent financial advice.

Harvey Jones has positions in M&g Plc. 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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