FTSE 100 investment manager M&G (LSE: MNG) remains one of my top-performing passive income shares.
These are stocks chosen for their ability to generate very high annual dividends without much effort on my part.
If these returns are invested back into the stock that paid them — ‘dividend compounding’ – the yearly income can be extremely high.
I aim to increasingly live off this income whilst reducing my weekly working commitments.
Key qualities in my passive income stocks
The starting point in my initial passive income share screening process is an annual yield above 7%.
This figure compensates me for the extra risk involved with investing in stocks rather than the ‘risk-free rate’ of UK 10-year government bonds. The current yield on these bonds is 4.5%.
The second element I want is an undervalued share price. I rarely sell my passive income stocks, but I do not want to take a loss if I do.
An undervalued share price reduces the chance of this happening, in my experience. Conversely, it increases the chance of my making a share price profit in this event.
Underlying both is the third quality I look for in my passive income holdings – earnings growth potential. It is ultimately this that drives a firm’s share price and dividend higher over time.
How does this stock rate on these criteria?
M&G has one of the highest yields of any stock in any FTSE index – currently, 9.5%. This is way more than double the average FTSE 100 yield of 3.5% and nearly triple the FTSE 250’s 3.3%
Moreover, analysts forecast that the firm’s dividend will increase from 19.7p to 20.7p in 2025, 21.3p in 2026, and 22.9p in 2027. These would generate respective yields of 9.5%, 10% and 11%.
The firm also looks extremely undervalued to me. More specifically, using other analysts’ numbers and my own, a discounted cash flow analysis shows the shares are 54% undervalued right now.
This means their fair value is theoretically £4.52. A risk to this is a resurgence in the cost of living that may cause customers to cancel their policies.
However – and my final investment criterion satisfied – analysts forecast its earnings will grow 26.7% every year to end-2027.
How much passive income can it generate?
Investors considering a stake of £11,000 (the average UK savings) in M&G would make £1,045 in first-year dividends.
On the same average yield, this would rise to £10,450 after 10 years and £31,350 after 30 years.
However, using the aforementioned dividend compounding process would greatly boost these numbers.
Doing this on the same 9.5% average yield would generate £17,337 in dividends after 10 years, not £10,450. And after 30 years on the same basis, this would increase to £177,043 rather than £31,350.
With the initial £11,000 included, the M&G holding would be worth £188,043. This would be paying £17,864 in yearly passive income by then.
Given the share price undervaluation in my view, the huge yield, and the high earnings forecasts I will be buying more M&G shares very soon.
