I hold a number of income shares in my portfolio. The dividends can generate substantial passive income streams. One I already own has just announced another increase in its dividend. That makes it even more attractive to me than before. If I had spare cash to invest right now, I would be happy to add to my holding.
Repeat dividend raiser
The share in question is M&G (LSE: MNG). It was spun out of Prudential in 2019 so has a limited history as an independent listed company. But in that time it has proven a rewarding share to own.
M&G has a dividend policy of aiming to maintain or raise its dividend every year. While that is never guaranteed, so far the company has consistently delivered on its goal since achieving its own listing.
The interim dividend this year grew by a modest 1.6%. This morning, the firm announced its full-year results. As part of them, the second interim dividend was increased by 9.8% to 13.4p per share. That means the annual dividend has grown 7.1%. It now stands at 19.6p per share. Given the current M&G share price, that translates to an 8.8% dividend yield.
Rewards and risks
As a shareholder, I am happy about the increase. It also makes the prospect of buying more of the shares attractive to me.
But an 8.8% yield is high for a FTSE 100 share. That could suggest that other investors see risk in the shares that perhaps I am overlooking. Have I missed something?
Last year’s business performance did show possible signs of weakness. The pre-tax adjusted operating profit fell 27%. It still came in at £529m though. I think that is solid given that M&G has a market capitalisation of around 10 times that amount.
Using the International Financial Reporting Standards approach, a modest profit turned into a £1.6bn loss. Meanwhile, assets under management and administration fell 8%. None of that sounds great on paper. I do see a risk that client outflows and market turbulence could hurt both revenues and profits at M&G.
However, such movements also help explain the swings in performance last year. While assets under management fell partly due to share prices, the company recorded a net inflow of funds except in its Heritage business. In reality, I think the underlying business health is stronger than suggested by reporting standards that are influenced by fluctuating asset values.
High-yield income shares
So although the business carries risks, I am confident M&G will be able to continue paying its dividend at the current level – and hopefully growing it too.
The sizeable increase in the final dividend, especially compared to the interim payout, makes me feel management is upbeat about the business outlook. By simplifying its operating model, the firm aims to reduce costs. That could help it benefit even more from competitive advantages including its well-known brand and large customer base spanning a large variety of markets.
I plan to continue holding M&G alongside other high-yield income shares in my portfolio.
