So far, the FTSE 100 index has had a rough ride this month. Since 31 July, the Footsie has lost over 350 points, a decline approaching 4.6%. But as share prices fall and dividend yields rise, the passive income from shares looks ever more tempting to me.
Two top shares for passive income
A week ago, my wife and I embarked on a buying spree of cheap UK shares. Alas, it seems that I am ‘the Master of Mistiming’, as our first two new stocks have declined substantially in the space of a week.
However, we bought these two new holdings to generate extra dividend income over the long term. So I’m annoyed — but not panicking — over our latest buys. Here they are, offering a tasty average dividend yield of 7.8% a year.
Dividend stock #1: Anglo American
Shareholders in multinational mining giant Anglo American (LSE: AAL) have had a tough time lately.
On top of falling 6.9% in the past five days, Anglo shares have lost almost a third (-32.8%) of their value over 12 months. However, this FTSE 100 stock is up by 32.1% over five years. Note that these returns exclude Anglo’s cash dividends, which have been hefty in recent years.
However, weaker growth in China and falling commodity prices have hit miners’ cash flow and earnings this year. That said, as we move towards decarbonising the global economy, demand for metals such as copper, iron ore, and nickel should rise, boosting Anglo’s future profitability.
At the current share price of 2,015p, this group is valued at £27bn, making it a Footsie stalwart. Yet this stock offers a market-beating dividend yield of 5.3% a year, versus 4.1% for the wider FTSE 100.
In our first week as Anglo shareholders, my wife and I have had a tough time — and I expect this volatility to continue in 2023. However, 10 years from now, I hope to be pleased with this latest purchase.
Income share #2: M&G
The second share we bought last week for passive income was investment manager M&G. Compared to Anglo American, this 92-year-old global asset manager is somewhat boring (but I like that).
Founded in 1931 and spun off as a separate London-listed business in October 2019, M&G managed over £342bn of client assets at end-2022. Today, it has around 5m individual investors and more than 800 institutional clients.
Of course, M&G’s fortunes are closed tied to those of global financial markets. Thus, when stock and bond prices plunged last year, the group’s earnings and share price followed suit. As well as being down 4% in the past five days, this share has lost 12.9% of its value over one year.
Since it floated in London at 220p a share almost four years ago, M&G stock has lost 13.9%. Again, these returns exclude dividends, which are massive nowadays. Indeed, the firm’s dividend yield of 10.4% a year is one of the very highest in the FTSE 350 index.
At M&G’s current share price of 188.85p, the business is valued at under £4.5bn today. If I could buy the entire company at this valuation, I absolutely would. Instead, I’ll just have to be content with the passive income from our holding in this dividend dynamo!