Making money while we sleep – the most extreme example of passive income – has always appealed to me. And the most straightforward way of doing this I have found is to buy high-quality shares with high yields.
Investment firm M&G (LSE: MNG) is listed in the London Stock Exchange’s (LSE) premier index – the FTSE 100. So, it is a high-quality stock, abiding by the rigorous rules and regulations of the benchmark exchange.
It also yields just over 10%, which puts it around the very top of the index’s payout leaderboard.
There are risks attached to the company, of course. The ongoing cost-of-living crisis may affect client inflows. There may be another financial crisis at some point, which might make trading profits more difficult to generate.
However, its core business makes high yields look sustainable to me. And better still is that the stock is trading at a 15% discount to its 2 March high this year.
Why is it at a bargain level?
In my view, a key reason why it lost 15% of its value was nothing to do with the company.
It resulted from general fears of a new financial crisis that began on rumours of troubles at Silicon Valley Bank.
However, new rules to strengthen UK financial firms’ balance sheets came in after the Great Financial Crisis.
Consequently, I believe that no enduring discount to M&G’s share price based on this factor is warranted.
New accounting standard fears
Another reason for the slide in share price was the potential impact of new accounting rules on its figures.
However, on 20 July M&G said the new rules will not change its strategy, solvency position, capital management framework, or dividend policy.
It added that it remains committed to achieving its financial target of generating £2.5bn of operating capital across 2022-2024.
Again, then, I see no reason why its share price should continue to reflect this fear either.
Core business remains solid
Its 2022 results showed operating capital of £821m, with improved underlying capital generation of £628m.
It also maintained a Shareholder Solvency II coverage ratio of 199%. This level of coverage is seen as very strong protection against insolvency.
Additionally positive in the Q1 update was £1bn of net inflows to its wholesale asset management business. This was up £0.3bn from Q1 2022.
Big passive income payouts
In the 2022 results, it declared a second interim dividend of 13.4p per share. Added to the first payment of 6.2p, this meant a total payout of 19.6p.
Based on the current share price of £1.95, this gives an annual yield of 10.05%.
Even at a 10% average over 10 years, a £10,000 investment now would make me £1,000 per year in passive income.
At the end of 10 years, I would have made an additional £10,000 — doubling my money over that timescale.
This return would not include further gains from any reinvestment of dividends or share price appreciation. On the flipside, there would also be tax liabilities, of course, or share price falls.
I already have holdings in the sector. But even with these, I am seriously thinking about buying M&G shares. I believe the losses in the share price are unwarranted and will be reversed over time. I also expect it to stick to its history of paying healthy yields.
