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.
