£6k bought me 3,289 oversold shares with a stunning dividend yield of 10%

Harvey Jones is getting a handsome dividend yield from the FTSE 100 high income stock, but he wonders if the payouts are sustainable.

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I can’t believe I can buy a FTSE 100 blue-chip paying a brilliant dividend yield of 9.98%. Yet I can and I have.

I invested £2,000 in wealth manager M&G (LSE: MNG) in July, September and November last year. My £6k stake bought me 3,028 shares and the dividend income has already started rolling in.

I got my first payout of £133 in November and a second worth a thumping £405 in May, and reinvested both to buy another 261 shares. I can expect more of the same, with M&G shares forecast to yield 9.98% in 2024 and a staggering 10.3% in 2025.

FTSE 100 income hero

At this rate, I’ll double my money in just over seven years. If the M&G share price grows, I’ll get that on top. So what’s the catch?

The shares aren’t growing. They’ve barely shifted since M&G was hived off from Prudential in June 2019. They opened at 202.65p. Today, they’re at 204p. Over the last 12 months, they’ve climbed just 1.25%.

Personally, I believe things will pick up. When interest rates are finally cut, ultra-high-yielders like this one will look even more attractive relative to cash and bonds. Shares should recover across the board, driving up M&G’s net customer inflows and assets under management. That should lift the share price.

With rate cuts delayed again, the stock has fallen 13.23% in three months. I see this as a buying opportunity. The shares trade at a modest 9.35 times forward earnings. The big question is: will that dividend hold? Double-digit yields are notoriously unreliable. So what does M&G’s short, five-year track record suggest? Here’s what the chart says.

Chart by TradingView

The board has steadily increased dividends, just not by much. The last hike was a barely-there 0.1p to 19.7p per share.

I want to buy more

The share price fell as a result, even though the group had just posted a 28% increase in full-year 2023 profits. My guess is that management looked at that sky-high yield and thought, that’ll do for now. I don’t think we can expect better until the share price kicks on.

In many respects, that’s fine. It’s a pretty juicy yield. The board also affirmed its “policy of stable or increasing dividends”. Operating capital generation jumped 21% to £797m. Group CEO Andrea Rossi expects it to hit its three-year target of £2.5bn by the end of this year.

The group has also re-entered the booming bulk purchase annuity market and anticipates sales of £1bn to £1.5bn a year, opening up a fresh line of income.

That yield isn’t 100% secure, but it looks more solid than it should do. Given the recent share price drop, I’m tempted to top up my stake. I enjoyed getting a £400 cash injection in my portfolio in May. I fancy a bigger one next time. The dividends are generous, but I have to accept they won’t grow as fast as I’d like.

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.

Harvey Jones has positions in M&g Plc. The Motley Fool UK has recommended 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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