As an income investor, high-dividend-yield stocks are very attractive. What counts as a high dividend yield? Well, usually anything above the FTSE 100 average would be classed as high. At the moment, the average yield for the index sits at 3.75%. Given the recent sell-off in the market due to fears of a strong second wave of the virus, yields have been heading higher.
Remember that the dividend yield is made up of the dividend-per-share, and the share price. So with falling share prices, the yield has been increasing for some firms that continued dividend payouts. One good example of this is M&G (LSE: MNG). The recent moves mean the current figure stands at a whopping 11.4%! This is definitely a high-dividend-yield stock.
Retaining dividends in an ISA
Most people are familiar with the benefits of a Stocks and Shares ISA when it comes to capital growth. If you keep a stock within the ISA and sell it for a profit, you don’t have to pay capital gains tax on it. But fewer people are aware that you’re able to receive your dividends in the ISA, which doesn’t impact your dividend allowance. At the moment, the regular dividend allowance is only £2,000 per year, so this can easily get eaten up, especially when holding a stock with a 10%+ dividend yield. So I’d recommend holding M&G in an ISA in order to fully benefit from the income received.
Why is M&G high-yield?
As mentioned above, the story here is in two parts. Firstly, the share price has fallen around 35% since the start of the year. This was due to some underperformance at the firm, shown up in the half-year update. It saw £7.7bn worth of outflows from retail investors, meaning the assets under management shrank. Since M&G makes money in part based on fees charged on the money it manages, this is a negative.
On the other side, the stock has a high dividend yield as the dividend has remained strong. The interim dividend was actually paid yesterday, and there’s been no news that the firm has plans to cut it going forward. In the half-year update, the outlook for the firm was said to be “resilient“.
Obviously the key risk here is that performance worsens to a point that a dividend is no longer viable to be paid. At this point, the high-dividend-yield figure becomes irrelevant until a dividend payout is resumed. But for stocks with a yield of 10%+, you do have to accept some risk when buying. There are much safer dividends, but the yield is 1%-3%.
Worth the investment
Even with the potential risk, I still think that M&G is worth it given the size of the dividend yield available. If you pick up just one year of dividends before it gets cut, this would cover you for a decade of income from a stock yielding just 1%. When housed in an ISA, I think this is a great buy right now.
jonathansmith1 has no position in any of the shares 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.