Even as UK shares reach record highs, there are still plenty of juicy dividend yields to capitalise on. And some have started venturing closer to double-digit territory.
Investing in high-yield stocks requires vigilance. After all, not every chunky payout’s sustainable. And investing in a business that’s later forced to cut dividends seldom ends well. With that in mind, let’s take a closer look at an unloved FTSE 250 firm – Man Group (LSE:EMG) with its 7.6% dividend income offer.
Investigating the yield
Over the last 12 months, the shares of this asset management firm haven’t been on a great run. In fact, they’re down by roughly 25% since last August, which is why the stock now offers such an impressive yield. The problem lies with its performance fees, or rather, the lack of them.
With the financial markets experiencing turmoil, Man Group’s active investing strategies have struggled to deliver market-beating returns across its various funds. As such, despite assets under management actually climbing to record highs, its core pre-tax profits took a nasty 43% hit in its latest interim results.
This perfectly highlights the company’s dependence on its volatile performance fees compared to other asset managers who typically rely on more stable management fees. This makes the firm’s cash flow far more challenging to predict while also making the dividend susceptible to market shocks.
So far, the company’s managed to maintain and expand shareholder payouts for the last five years despite the challenges endured along the way. But with growing macroeconomic pressure, client loyalty and stickiness may soon be getting tested, putting today’s high dividend yield at risk.
Room for optimism
While Man Group’s recent performance leaves much to be desired, there are still some encouraging trends hiding under the surface. As previously mentioned, despite the challenges, the company’s continued to attract fresh client funds, pushing assets under management higher.
That’s important given that a stabilisation of market volatility and the emergence of new opportunities could create some lucrative returns for its active funds. And, in turn, deliver a substantial rebound in performance fees that could send both earnings and the share price flying.
The balance sheet also appears to be in a relatively healthy state with a net cash position. And management also has access to a large undrawn revolving credit facility, granting ample short-term liquidity to support its now elevated dividend yield while awaiting a profit rebound.
The bottom line
All things considered, Man Group seems to offer a unique blend of growth, income and value opportunity for investors. The discounted valuation could make buying shares today a highly lucrative decision if the company’s successful in restoring its performance fee income.
However, there’s no denying this comes with significant risks. The stock will likely remain volatile and dependent on its active funds’ performance, something that management doesn’t have a great deal of control over. After all, the stock market’s notoriously unpredictable in the short term. With that in mind, even with a 7.6% dividend, this isn’t a stock I’m rushing to buy today.
