The best way to secure a passive income from the stock market is to buy when prices are low and dividend yields are high, right?
There are some big yields from FTSE 100 stocks right now. Forecasts suggest the cash paid by top-tier stocks could smash the all-time record in 2024. So it must surely be a good time to go for it.
Risky yields?
But why would the big investors be avoiding these big dividends? Maybe they’re not confident in the forecasts.
For example, Vodafone is on a 9.6% dividend yield. But I doubt that can be sustained, not when the firm has embarked on a cost-cutting campaign. It could still be a good long-term investment, mind. Just perhaps not at that level of income.
Weak sentiment
Then some stocks are down because the whole sector is out of favour. Right now, I think this describes pretty much all financial stocks, including banks, insurers, and investment managers.
And that must give private investors an advantage. Unlike the big fund managers, we don’t care about the next quarter’s earnings.
And we’re not worried about the risks to the sector brought by inflation, interest rates, bad debts, and all the rest. We just don’t care if our share prices fall in the short term. Well, we don’t, do we?
So what is it?
What’s this financial stock I’m thinking about that might net me some long-term passive income? It’s investment manager M&G (LSE: MNG).
M&G was spun out from Prudential in 2019, which turned out to be a pretty tough time for it to head out as an independent company. It was barely started when the 2020 stock market crash hit.
The shares are now down 20% from their early 2020 peak, just before things turned bad.
Big yield
That’s better than some though. And with analysts upbeat, the fall has helped push the forecast dividend yield up to 9.9%.
At today’s price, £20,000 would get me about 10,000 shares. That’s a year’s ISA allowance, so it’s a fair chunk to put all in one stock. But I go for diversification over the years. So if I had the money, I’d be fine with that.
How much?
What might it earn me in passive income? Right out of the blocks, that 9.9% could get me £1,980 a year, or £165 a month.
But if I reinvest my dividends each year for the next 20 years, my £20k could grow to more than £130k. And I could pocket £13,000 a year from that, which is £1,090 a month.
This is an ideal scenario, with nothing changing from today’s share price and dividend. In reality, I’m sure both will vary over the years.
Things change
In particular, I think the M&G share price will recover, and I wouldn’t be able to buy as many new shares each year with my dividends.
Still, in the short term, the economic risks might just send M&G shares even lower. So then I could buy even more. Look on the bright side, eh?
M&G shares are high on my buy list for when I next have cash to invest.
