A cheap stock with a sky-high dividend can be enormously enticing. This is especially the case when markets are in a funk as they are now. Fortunately, I think I’ve found a great example of a cheap FTSE 100 dividend share that’s worth buying today.

Monster dividend yield

Based on the current consensus among analysts, insurer and asset manager M&G (LSE: MNG) offers a stonking forecast dividend yield of 8.9% for FY22. That’s one of the biggest in the FTSE 100. It’s also well over double the yield generated by the index as a whole.

Of course, the question that any dividend hunter has to ask is how sustainable the bi-annual payments actually are. On this front, I think investors can sleep safely (for now). 

The FTSE 100 member’s recent set of full-year results were certainly well received. Although adjusted operating profit dipped from £788m to £721m, the firm was able to confirm that it hit all its commitments since demerging from giant Prudential.

These included total capital generation of £2.8bn in two years, “well ahead” of the £2.2bn target set for the end of 2022. On top of this, the company also hit its costs savings target of £145m one year ahead of schedule. 

As a result of this, M&G announced it would be returning £500m back to holders via a share buyback. No wonder the share price jumped on the day. 

Decent outlook

I think this form could continue in 2022. Through a combination of acquisitions and product launches, the £5.5bn-cap is expanding its services in the UK and Europe. A resolution to the conflict in Ukraine and a full post-pandemic recovery could also see more savers’ money finding its way to the company.

Looking further ahead, M&G stands to benefit from an ageing population that’s realising how insufficient the State Pension might be for their desired lifestyle on retirement.

Risks to consider

Naturally, I’d be a complete fool (rather than a Fool) if I didn’t consider the potential risks here.

Unsurprisingly, there’s no guarantee that dividends will always be paid. The global pandemic, while a once-in-a-century event, showed us that the income stream is usually one of the first things to be sacrificed in an effort to shore up cash. As far as M&G is concerned, it’s worth mentioning that profit is expected to cover the FY22 payout just 1.1 times. That’s already rather low.

Away from the dividends, I would also need to be comfortable knowing that M&G’s share price performance will likely be heavily correlated with the health of the UK economy. That’s not necessarily an issue for long-term investors like myself. However, knowing that the stock is still 6% below where it stood when M&G was listed in 2019 is a sober reminder that my capital can fall as well as rise in value.

Cheap FTSE 100 stock

Of course, investors might argue that a lot of risks are already in the price. M&G shares change hands at just 10 times forecast earnings. That looks pretty reasonable to me. Yes, there are similar companies trading on even cheaper valuations in the UK market. However, the dividend stream isn’t quite so big.

Overall, I consider this a good candidate if I was looking to build a diversified, income-focused portfolio.  

The post 8.9% yield! 1 cheap FTSE 100 dividend share to buy today appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.

To generate around £800 a month in tax-free passive income, I need ISA savings of £240,000. How do I know that? Thanks to an often overlooked investment benchmark called the 4% rule. Put simply, this states that if I withdraw 4% of my retirement portfolio as income each year, my pot will never run dry.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

How I’m building a passive income for retirement

The 4% rule assumes average investment growth of 7% a year, including dividends. If I withdraw 4% a year and inflation averages 3%, my portfolio will stay roughly the same size. Of course, none of those figures are guaranteed, but a target of £240,000 in ISAs looks just about doable, at a stretch. And 4% of that is £9,600 a year, or £800 of monthly passive income. It’s not riches, but it’s better than relying purely on the State Pension.

So much for rules. I will also have to knuckle down and build enough ISA savings to generate my target income. There’s still a way to go, but I’m taking advantage of current stock market volatility to top up my portfolio. I need to act fast, because the annual ISA deadline is just one month away, at midnight on 5 April.

The FTSE 100 is one of the best stock markets in the world for dividends, and I’m underpinning my portfolio with a couple of top equity income funds. I’m a long-standing fan of the City of London Investment Trust, and it’s about time I bought it. Its current yield is a rather splendid 4.48%. The ongoing charge is just 0.38%, so I’d get to keep most of that juicy passive income for myself.

I’m also investing in FTSE 100 stocks

City of London has even started to generate some growth, as the FTSE 100 swings back into favour, rising 15.4% in a year. I’ve been investing in the Rathbone Income fund for years. Its yield is lower at 4.06% and charges are higher at 0.75%, so I may rethink this choice, but it has grown steadily for the 15 years I’ve held it, and I’m reluctant to let it go.

To generate the rest of my passive income, I would look to build a portfolio of individual FTSE 100 stocks. I like the look of Lloyds Banking Group right now, as rising interest rates should boost its net lending margins. Yet it still trades at a dirt-cheap P/E of just 6.1 times earnings. The dividend yield is now 4.34%, and I expect that to continue climbing.

Oil giants BP and Shell are rising along with the oil price, and I’d buy them both, along with passive income heroes including mining giant Rio Tinto, financial firms M&G and Phoenix Group Holdings, housebuilder Persimmon and mobile phone operator Vodafone.

Of course, I have to remember that each of these stocks comes with risks, both sector- and company-specific. But I feel that owning a basket of them mitigates some of the risk for me.

I hope that the 4% rule will serve me well when the time comes to retire.

The post I’m targeting £800 a month passive income from dividends thanks to this forgotten rule appeared first on The Motley Fool UK.

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Harvey Jones holds Rathbone Income but 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.

Savings and investment firm M&G (LSE: MNG) yields a stunning 7.5%, covered 2.4 times by earnings. It looks like one of the best stocks to buy for both dividend income and growth. Its share price has climbed 72% in a year (although don’t expect that breakneck pace to continue).

The FTSE 250 stock was spun off from Prudential in 2019. M&G looks undervalued to me, trading at just 5.5 times earnings. Perhaps that’s because it lacks a long-term track record. As well as one of the best stocks to buy for income, it’s one of the cheapest.

The FTSE offers rich pickings for dividend stocks

M&G’s first full-year results in March were mixed. Adjusted operating profit before tax fell from £1.15bn to £788m, although this was largely down to initial infrastructure costs. Assets under management rose following an acquisition, but investor outflows totalled £6.6 billion, amid weak investment performance.

The stock market rally will hopefully reverse that. Despite these concerns I’d buy M&G for high income, and steady growth.

Cardboard box and packaging specialist Mondi (LSE: MNDI) has a less dramatic yield of 4% a year, but that’s still solid. The FTSE 100 company looks to be among the best stocks to buy today because it gives investors exposure to the fast-growing e-commerce sector. Earlier this month it reported “strong” demand as online shopping surged. Q1 earnings were down 8% to €353m year-on-year, but jumped 14% on the previous quarter.

The best stocks to buy for long-term income and growth

Like a growing number of companies, Mondi has seen input costs rise as paper, resin, energy and transport prices increased. However, it has some pricing power, and has been able to pass on higher costs to customers We may buy less stuff online now that we can hit the high street again, but I believe the long-term trend for e-commerce is upwards. Trading at 17.2 times earnings, the Mondi share price isn’t dirt cheap, but it isn’t expensive either.

FTSE 100 power giant SSE (LSE: SSE) nearly always features on my list of the best stocks to buy for income. It has a terrific record of increasing its dividend in line with prices, and now yields 5.3%.

SSE faces a tricky balancing act as it looks to establish itself as a renewables specialist while also relying on income from legacy fossil fuels. So far, it’s risen to this challenge better than, say, BP and Royal Dutch Shell, so I remain optimistic.

On Wednesday, it reported a 1% increase in full-year underlying operating profit to £1.5bn, after taking a £170m knock from the pandemic. Underlying earnings per share rose 5% to 87.5p. Management reaffirmed its commitment to grow the dividend in line with RPI for the next two years. Thereafter, it depends on how success of its green transformation.

Today, SSE remains one of the best FTSE 100 stocks to buy for solid, high income. I’m optimistic that’ll continue.

The post Best stocks to buy for income! I’d target these 3 FTSE dividend shares appeared first on The Motley Fool UK.

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• £20,000 invested in a Stocks and Shares ISA over the last year is now worth…
• An 8.4% forecast yield but down 16%! Time for me to buy more of this FTSE 100 passive income star?

Harvey Jones 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.

Insurance consolidator Phoenix Group Holdings (LSE: PHNX) is one of my favourite stocks on the FTSE 100 index. It is underpinned by a solid business proposition. Basically, it buys up old life insurance and pension funds that are closed to new business, and manages them on behalf of members. The more it buys, the greater the economies of scale.

The Phoenix share price was unfairly hammered during the March stock market crash but has mounted a solid recovery, climbing 20% in the last three months. The main attraction is its dividend. Right now, it yields 6.93%.

Phoenix rises from the stock market crash

That payout looks pretty secure, with management today announcing “strong” first-half cash generation of £433m, up from £287m last year. Cash generation was boosted by the recent acquisition of Swiss Re AG’s UK unit ReAssure. Phoenix is able boast a winning combination of “cash, resilience and growth”, something few other companies can say right now.

In a further sign of its resilience in the stock market crash, the group’s Solvency II surplus climbed from £3.1bn at the end of last year to £4bn on 30 June. Its shareholder capital coverage ratio climbed from 161% to 169% over the same period.

Group operating profit grew 11% to £361m. While the Phoenix share price is unlikely to shoot the lights out, its generous dividend should keep them burning nicely. A rare ray of hope amid today’s dividend darkness.

Another top FTSE 100 dividend stock

The M&G (LSE:MNG) share price has recovered at an even faster pace after being caught up in the stock market crash. It is up 33% over the last three months. Once again, it combines financial strength with a meaty dividend. Right now, M&G yields 7.22%. Who says you cannot generate income from FTSE 100 stocks these days?

The FTSE 100 newcomer has a solid shareholder Solvency II coverage ratio of 168%, and affirmed its commitment to continue paying dividends. As with Phoenix, the investment manager has not put any staff on furlough or tapped into government support.

While the pandemic has not completely passed these companies by, it has certainly left them relatively unscathed. Assets under management at both companies will fell in the stock market crash, again, the damage was minimal.

M&G also operates a closed fund, the Prudential UK life insurance and annuity book, which generates steady cash flows. It is aggressively seeking out new growth opportunities, buying a wealth management platform from Ascentric, which has £14bn of assets under management. Last month, it launched a £183m bid for home loans platform UK Mortgages.

It’s hard to believe that you can buy two solid FTSE 100 stocks yielding 7% right now, but you can. And I would.

The post Stock market crash winners: I’d buy these 2 solid FTSE 100 stocks for their 7% yields appeared first on The Motley Fool UK.

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Harvey Jones 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.

The demerger completed two weeks ago, but I currently see merit in continuing to hold the M&G shares, at least for the foreseeable future. Indeed, I’d go so far as to rate the stock a ‘buy’ right now, along with its former parent Prudential. Here’s why.

Sum of the parts

When I was writing back in March, Prudential’s shares were trading at around 1,600p. I felt a sum-of-the-parts valuation of about 1,900p was reasonable, and I was looking for the demerger to unlock this value.

Investors who bought Prudential at 1,600p now own PRU shares, trading at 1,358p, and a matching number of free MNG shares, trading at 217p. This totals 1,575p. In other words, the combined value of the split businesses is around the same as when they were together, and the 1,900p I was looking for hasn’t been realised — yet. I still think it will be in due course.

M&G profile

As an asset manager and closed-book insurer in mature UK and European markets, M&G may not have the exciting growth potential of Asia-focused Prudential, but its cash flow profile, and ability to provide shareholders with generous dividends, is attractive for income seekers.

We have a situation where growth-biased investors who bought PRU now also hold MNG shares. Analysts expect a pretty much full recycling of MNG’s shareholder base over time, with income-seeking investors replacing the growth-biased holders.

Compelling value

I think the shareholder-base dynamic is depressing the share price at the moment. While M&G might have an unexciting growth outlook, I think the stock offers compelling value at the current level on an 18-month view.

My sums say investors can look forward to an 11.9p a share final dividend this year, along with a 3.85p special dividend. The 15.75p total gives a yield of 7.3%. I anticipate an 18.5p dividend in 2020 for a yield of 8.5%. These yields add up to an 18-month dividend return of near 16%.

I’m also anticipating a re-rating of the shares, as the churn of the shareholder base plays out. I can see M&G coming to trade with a peer-like 7% 2020 dividend yield, rather than the current 8.5%. This would see the share price rise to around 265p — representing 22% upside from today’s level. As such, I’ve pencilled in an 18-month total return (share price appreciation plus dividends) of 38% from M&G.

Long-term pick

Meanwhile, Prudential, my long-term pick of the two, also currently looks cheap. To realise my 1,900p total valuation of MNG and PRU, the latter’s share price would have to rise from its current 1,358p to 1,635p (20% upside). I’m also anticipating about 65p of dividends (4.8% yield) over the next 18 months, so a total return for the period of near 25%.

The 20% upside for PRU’s share price looks eminently reasonable to me. It would be trading at 11.2 times forecast 2020 earnings — still below its average historical multiple, and this for a company with a higher earnings growth outlook since the unyoking of M&G.

The post Why I wouldn’t sell the MNG share price to buy more Prudential yet! appeared first on The Motley Fool UK.

More reading

• Looking for FTSE 100 bargain stocks? Check these out!
• 1 ultra-high-yield UK dividend stock to consider buying before the 5 April ISA deadline
• Could £15,000 in these 3 FTSE 100 stocks really deliver £1,230 of passive income?
• £20,000 invested in a Stocks and Shares ISA over the last year is now worth…
• An 8.4% forecast yield but down 16%! Time for me to buy more of this FTSE 100 passive income star?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.