I can see a heap of great value FTSE 100 stocks that I’d love to buy via my Stocks and Shares ISA. But what if I decided to go all in and invest my full £20,000 in one of them?
As a rule, I’m in favour of diversification. It helps spread my risk across different companies and sectors, reducing the risk if one fails.
Yet it’s possible to take a good thing too far, as Warren Buffett said: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Warren Buffett would have some harsh words for me
He also said: “Diversification may protect wealth, but concentration builds it.”
Buffett is clearly an investment genius but annoyingly, I’m not. I’m just an ordinary bloke giving it my best shot. So I’ll continue to diversify but with around 25 UK stocks in my portfolio, I’ve gone far enough down that track.
Now I’m wondering whether to dramatically increase my stake in a value stock I already hold: FTSE 100 wealth manager M&G (LSE: MNG).
M&G shares have a mind-boggling forecast yield of 9.95% in 2024. If I was to invest my entire £20k ISA allowance in the stock, that should give me a stunning annual income of £1,990.
The shares are forecast to yield 10.2% in 2025. So next year I’d hopefully get a whopping £2,040. The problem is that double-digit yields like this have a nasty habit of being cut, as they become unsustainable. And that often wreaks havoc on the share price too.
I’m not brave enough to go all invest all of this year’s Stocks and Shares ISA into M&G, whatever Mr Buffett says. But I’ll consider investing £5k this year, on top of the £7k I already hold. That would lift my stake to £12k stake giving me a forecast income of £1,224 in 2025.
Then I’ll work towards my goal by investing another £4k in M&G next year and then £4k more after that, lifting my total holding to £20k. If the dividend holds, my income should exceed £2,000 a year by 2026.
The M&G share price is down 4.45% over the last year. While the sky-high yield lifts its total return into positive territory, that total return of around 5% isn’t amazing. I could have got similar from a savings account.
This is a stunning FTSE 100 income stock
However, I buy shares with a long-term view, and over time I think M&G’s combination of dividends and share price growth will beat any savings account. Albeit with more volatility. Yet this isn’t guaranteed and there are clearly risks.
2024 has been tough on FTSE 100 high yielders like M&G. I expected them to fly when interest rates were cut, at which point savings rates and yield would also fall. Yet rates now look set to stay higher for longer. That also makes it more expensive for M&G service its £8bn net debt.
CEO Andrea Rossi complained of a “challenging market environment of in the first half of the year”, which led to £1.5bn in net outflows, while pre-tax operating profits fell 3.8% to £375m.
Capital generation slipped but Rossi expects better in 2025, lifting its forecast from £2.5bn to £2.7bn. The dividend looks secure and I’ll reinvest every one I get. I’d expect some share price growth too, when the financials sector gets a re-rating.
