I like buying dividend shares to generate passive income. It lets me earn money thanks to the hard work of proven blue-chip businesses.
Looking forward to the rest of this year – and beyond – I have been considering possible passive income ideas for my portfolio.
Here’s my favourite.
FTSE 100 high-yield share
Asset manager M&G (LSE: MNG) is on my shopping list for when I have spare cash to invest.
In fact I already own this high-yield share. But I am so upbeat about its income prospects that I would be happy to own more of it. That would hopefully offer a welcome boost to my passive income streams.
That is because the FTSE 100 member currently offers an 8.9% dividend yield. That means investing £10,000 today ought to earn me almost £900 in passive income annually.
In fact, I reckon the annual payout could actually be set to grow.
Why I like this dividend share
So, what is it about M&G that grabs my attention?
As a business I think it has excellent commercial prospects. Asset management is an industry with large customer demand. It involves big sums of money, so even relatively small commissions can translate into sizeable profits.
M&G is active in over two dozen markets around the world, giving it geographic diversification. It has a customer base in the millions. It is experienced in its industry, benefits from a well-known brand, and has a proven business model.
Potential for dividend growth
The company’s strategy is to maintain or grow its dividend each year.
That is only a goal and in reality no dividend is ever guaranteed. What happens in practice will depend on how the business performs.
But it is worth noting that M&G has increased its annual dividend in each of the past several years. The most recent dividend declaration, of the interim payout, saw year-on-year growth of 4.8%.
The past several years also saw a large share buyback programme alongside the generous dividends. That demonstrates how cash generative the business is.
It also means that, as the company has reduced the number of shares in circulation, it can now pay a larger dividend per share than before without that necessarily costing more money overall.
Bargain or value trap?
But other investors have the same information I have. If this share offers such great-seeming passive income prospects, why are they not snapping it up, pushing up the share price and yield?
The M&G share price is almost exactly where it was when it was listed in 2019 (it has moved down by 0.1%).
One explanation could be that the business’s earnings record has been inconsistent. Last year, it recorded a loss of £1.6bn, equivalent to around 30% of the firm’s current market capitalisation.
But earnings can reflect elements such as moves in the valuation of some assets. I think for M&G a more helpful performance measure is to look at its cash generation. Operating capital generation in the first half of its current financial year topped half a billion pounds.
The business needs to stay competitive to reduce the risk of clients withdrawing funds to invest elsewhere. But I think it has the pieces in place to keep performing strongly and hopefully growing the dividend further in years to come.
That could help me sit back and earn more and more passive income!
