I spent most of last year buying FTSE 100 dividend shares in the hope they’d get a re-rating when interest rates started to fall.
Frankly, I was astonished by the income I could get from insurer Legal & General Group (LSE: LGEN) and wealth manager M&G (LSE: MNG). Not only were they offering sky-high yields, but their shares were dirt cheap too.
I did my due diligence before buying them though, to make sure those dividends were sustainable. I ruled out the FTSE 100’s highest yielder Vodafone Group on those grounds and felt vindicated on learnings its dividend will be slashed in half next April.
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Legal & General price struggles
So far, there’s been no such announcements from L&G and M&G. I’m not anticipating one either. I expect their dividends to rise over the next few years, albeit slowly.
Today, L&G offers a stunning trailing yield of 8.76%. M&G does even better, with 9.43%.
The most I could get from an easy access savings account is 5%, and that’s likely to slide when the Bank of England finally starts cutting interest rates. Possibly this week. When interest rates start to fall, savings rates and bond yields will inevitably fall. At that point, high-yield stocks like these two will look even more attractive.
Yet there’s a catch. Both L&G and M&G started to pick up after I bought them, but they’ve since crept back into their holes. Over 12 months, L&G’s down 3% while M&G’s up just 1.42%. Over three years, they’re down 13.82% and 9.19% respectively. Even those high yields can’t make up for that.
Over three years the FTSE 100 as a whole’s up 18.82%. It has a lower average yield of 3.7% but the total return will be far higher.
Yet I believe L&G and M&G have been harshly treated by investors and could soon play catch-up.
M&G looks a better bet
I’m a little concerned by L&G. It’s in the throes of a restructuring plan as it battles to revive shareholder value. Also, it looks pricey, trading at 31.22 times earnings. The recent £200m share buyback didn’t stir much excitement.
However, it does plan to boost dividends 5% in 2024, then 2% thereafter, with further share repurchases on top. The group also has an exciting growth opportunity in the US. Its asset management arm is due revival too.
M&G’s operating profit before tax totalled jumped 27.5% to £797m in 2023, smashing forecasts, while net client flows and operating capital generation both jumped. Yet investors chose to focus on its tiny full-year dividend hike of just 0.1p to 19.7p per share. Given the bumper yield, I was in a more forgiving mood. The M&G share price isn’t overpriced, trading at 16.33 times earnings, but it isn’t expensive either.
I’d buy more M&G shares today, no question. The only thing stopping me is that I already hold a big chunk of them. I wouldn’t buy L&G at today’s price, but I’m definitely holding what I’ve got. All the way to retirement and beyond, with luck. These two are still my favourite income stocks.
