Should I rush to buy this high-yield FTSE 100 giant for its huge 10% dividend?

We don’t see high yields quite as high as this very often. But should I invest in this one, or are there hidden dangers to avoid?

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M&G (LSE: MNG) offers a forecast dividend of 10% right now. And that’s a high yield if ever I saw one.

So should it be at the top of my wanted list? Today I’m looking at reasons to buy, and reasons why I might want to hold back.

The first plus is the big dividend itself. If it’s maintained, a 10% dividend yield could turn every £1,000 I invest today into £6,700 in 20 years. That’s if I bought new shares with the cash each year.

No-brainer?

But then, if it was a no-brainer to just buy every stock with a high yield, that’s what everyone would have already done. And that would have pushed the share price up and the yield down.

As it is, the M&G share price is down 9% since the company was spun off from Prudential in 2019.

No guarantee

There’s no guarantee over dividends. And if the big City investors are turning their noses up at M&G shares, that can surely only mean one thing. They don’t have high confidence that they’ll get the cash.

Looking at forecasts, I could understand that. Analysts expect earnings per share to fall short of the dividend this year. And, in fact, not cover it until as far out as 2025.

They do expect M&G to maintain the dividend. But any squeeze, and we might see that change pretty quickly.

Tunnel, light

Back to the plus points, and I see the latest decision by the Bank of England (BoE) to hold interest rates as one. And the small drop in inflation in August as another.

On their own, they don’t make a huge difference. But they are two glints of light in the tunnel that’s casting darkness on the whole savings and investment business.

Companies like M&G suffer when fewer people have the cash to invest with them. But does any long-term investor think that’s going to go on forever? I don’t.

There’s likely to be a time lag, though. And it could still take a fair time for inflation to get back to BoE targets. And for interest rates to return to normal.

Safer options

It might be better to go for safer dividends. There’s a forecast 8.5% yield at British American Tobacco, for example. And that should be covered around 1.5 times by earnings this year.

It’s a lower yield, but it looks like it’s in a lot less danger this year. And the stock is on a price-to-earnings (P/E) ratio of under eight, which I’d say adds a bit more safety.

Going for dividends with better cover by earnings can mean less risk. And it could actually make more money in the long term.

Verdict?

So, what’s my verdict?

Even with the risk, I do like the look of M&G’s high yield. And it’s on my want list for my next buy. I’d only buy it in line with my diversification strategy, though, which I think is essential to help manage risk.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c., M&g Plc, and Prudential Plc. 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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