I’d buy 5,102 shares of this FTSE 100 share for £1,000 a year in passive income (or more!)

Christopher Ruane explains why he believes buying into this household name might put him on the path to a growing four-figure passive income.

| More on:
Close-up of British bank notes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

My approach to generating passive income does not rely on wacky schemes or unproven business ideas.

Instead, I am happy to buy shares in companies with successful business models I think can help them generate spare cash to fund a dividend for shareholders like me.

As an example, if I wanted to target a £1,000 annual passive income right now from a single FTSE 100 share, here is how I would go about it.

Buying the business not the yield

I should start by explaining that I would not put all my stock market investments in one share. That would give me no diversification – and even the best-run company can get into unexpected difficulties on occasion. So, this would be alongside the other existing investments in my Stocks and Shares ISA.

The share I am eyeing is actually one I already own, M&G (LSE MNG).

Something that grabs many people about this share is its juicy dividend yield of 9%. That could mean that, for every pound I invest, I would hopefully earn 9p per year, every year, in dividends.

But as dividends are never guaranteed, it can be a (costly) mistake to look at yield alone.

Instead, in my quest for passive income, I want to be comfortable understanding how a business works and what its financial prospects are.

Otherwise I could buy a value trap – a share with a high yield that then collapses when the company cancels its dividend. That is exactly what happened at Direct Line last year.

Long-term cash generation potential

M&G is in asset management, not insurance. Still, some of the risks that have proven a challenge for Direct Line also apply to M&G, in my view.

For example, although demand for asset management is high, meaning it can be a lucrative business, that also means there is a lot of competition. That can put pressure on profit margins. I reckon M&G has some competitive advantages that can help it in this regard, from its powerful brand to its long history in managing assets.

Just as was the case with Direct Line (as insurers seek to generate returns by investing money), weak stock markets could hurt M&G’s business. That is because when shares perform poorly, investors may be tempted to sell, reducing the asset manager’s scope to earn commissions over the long term.

Still, M&G has a proven business model and has proven highly cash generative.

Indeed, it has had enough cash to buy back hundreds of millions of pounds worth of its own shares in recent years, alongside paying the generous dividend.

Doing the maths and aiming for a target

M&G aims to maintain or raise its dividend each year. This year, for example, the interim dividend grew 4.8% compared to last year.

If I wanted to target £1,000 in passive income every year, I could buy 5,102 M&G shares. At the current price, that would cost me around £11,225. If I had spare cash to invest, I would be happy to do that.

In fact, if the final dividend grows at the same rate as the interim dividend, investing that could put me on track for over £1,000 in passive annual income.

Any future dividend increases could boost my earnings even more!

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.

C Ruane has positions in M&g Plc. The Motley Fool UK has recommended M&g 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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »