Does the 9.4% dividend yield justify buying shares in this UK investment giant?

Mark David Hartley investigates the benefits and pitfalls of investing in a stock with one of the highest dividend yields on the FTSE 100.

| More on:
Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

High dividend yields are the ever-attractive promise of value investing, offering that little bit of extra return. But as many investors learn the hard way, high yields don’t always equate to high returns.

Not only can a company cut dividends whenever it likes, but a falling share price could negate any returns. To ensure long-term reliable growth, it’s important to look beyond the big, shiny yield.

So when I discovered that this FTSE 100 company boasts a huge 9.4% yield, I decided to investigate.

M&G (LSE: MNG) is a global investment management firm based in London. Despite 100+ years in business, it only joined the London Stock Exchange after de-merging from Prudential in 2019. It now operates five main subsidiary brands, M&G Investments, M&G Wealth, M&G Real Estate, Prudential UK, and Infracapital.

Straight off the bat, I’ll point out the biggest risk when choosing investment management stocks. While these stocks can beat the market at times, they also get hit hard when times are tough. Right now the economy is keeping steady but an economic slump could spell trouble. Fortunately, the upcoming election is expected the give the UK stock market a boost, so M&G might benefit from that.

Below average growth

As it was only recently listed there isn’t much historical price info to go on. It has a price-to-earnings (P/E) ratio of 16.8, slightly above the UK Asset Management industry average of 13. And its one-year price growth of 10% is low compared to the industry’s 20%. That’s not great. It suggests the price is still overvalued even after a big drop.

The slow growth is largely due to a 17% price drop in March this year after the firm announced its 2023 results. Despite the mostly positive outcome, investors were spooked by something. It seems a bit odd, considering revenue and earnings have enjoyed year-on-year growth of 362% and 124% respectively.

The fact that there doesn’t appear to be any obvious reason for the erratic price behaviour is even more concerning. Maybe the barely noticeable dividend increase left shareholders feeling hard done by? Who knows.

So, is it worth it?

For now, the price decline means the dividend yield has been inflated. That’s great for shareholders, especially those who bought at a cheaper level than the current price. Even if it continues to underperform, 9.4% annual returns are pretty good.

The share price has traded in a fairly tight range within about 10% of 200p for the past four years. If that continues, the shares may be worth buying just for the dividend alone. For example, if I bought £5,000 worth of the shares and reinvested the dividends for 10 years, it could grow to over £13,400.

While that’s a bit higher than the average I can expect from a FTSE 100 tracker fund, it’s not spectacular enough to grab my interest. Personally, I would need to see more solid evidence of potential price growth before buying the shares. However, if the stock market continues to improve and M&G benefits from it, I may revisit that decision.

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.

Mark Hartley has no position in any of the shares mentioned. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d aim to turn that into a £10,548 passive income each year!

Buying high-quality, high-yielding shares can generate a big passive income over time, especially if the dividends are used to buy…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

As AstraZeneca’s share price dips 4%, is it time for me to buy more?

Despite its 12-month increase, AstraZeneca’s share price appears very undervalued to me, and looks set to rise on strong growth…

Read more »

Investing Articles

FTSE 100 or S&P 500: where should I invest?

UK investors are often drawn to the high growth of US stocks. But there are pros and cons to be…

Read more »

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »