If you want to build a portfolio of blue-chip income stocks at the click of a button, you can’t go wrong with the FTSE 100, in my opinion.
However, the one downside of using this index as an income investment is volatility. When the going gets tough, the price of the FTSE 100 can crash, and this could be enough to put some income investors off.
With that being the case, today I’m looking at an FTSE 250 income stock that offers both a higher dividend yield than the FTSE 100 and tends to thrive in volatile markets.
The company is one of the world’s largest publicly-traded hedge funds and Man Group (LSE: EMG) manages around $114bn for clients around the world. The value of assets under management hit a record last year, thanks to a surge in inflows and a positive trading performance.
The company is best known for its computer-driven equity strategies, in particular its flagship AHL strategy that has been a pioneer of systematic trading since 1987. As well as the computer-driven trading business, the group also invests in private equity and infrastructure assets to help its investors achieve an attractive return.
Hedge funds like Man tend to thrive in uncertain and volatile environments because market volatility throws up opportunities that they can take advantage of quickly. I think the fact that the group’s assets under management rose to a record last year supports this argument — investors are placing their cash with the firm in the hopes that it can profit from uncertainty.
And as investors rush to give their money to the hedge fund manager, shareholders are set to benefit as well. One of the primary ways Man makes money is through investment management fees, and the more money that is deposited with the group, the higher the fee income stream.
City analysts believe the company’s earnings per share will rise 25% for 2019 to $0.18, giving a forward P/E of just 10. At the same time, they’ve pencilled in a dividend yield of 6.1%.
As well as returning cash to investors via a regular dividend distribution, Man is also buying back shares. The money being spent here is equivalent to an additional yield of 0.8%, giving a total shareholder yield of 6.9%.
Because Man invests in assets like private equity, where returns can be lumpy and unpredictable, the company’s earnings tend to jump around a lot. With this being the case, I think it’s appropriate to value the shares based not on profits, but on the stock’s total yield to investors.
Time to buy?
So, what’s my price target for Man? Well, based on the fact that the rest of the market is trading at a median yield of 3.9%, according to my calculations, the stock could trade up to 250p before it starts to look overvalued. At this level, the total shareholder yield would be around 3.9%, in line with the market average.
However, I don’t expect the stock to hit this level anytime soon, although I think a more conservative target of 200p might be possible.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.