M&G (LSE: MNG) offers one of the biggest dividend yields on the FTSE 100 right now. Forecasts suggest the investment mangement firm is set to deliver a whopping 10% this year.
Never mind beating the interest from a Cash ISA, it’s enough to beat inflation. And that’s saying something in 2023.
The big yield is partly due to M&G share price weakness. It’s done a good bit better than many in the financial services sector. But we’re still looking at a 15% fall in the past five years.
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Passive income
To build long-term passive income, I can’t think of anything better than high-yield shares, held for decades in a Stocks and Shares ISA.
Investing for a long time is far more effective than trying to time the market. But if we manage to buy when the share price is down, that’s a bonus. It means we can lock in higher effective dividend yields for as long as we hold the shares we buy.
So how could I build up a nice income stream from M&G shares?
Danger
Firstly, I must sound a note of caution. Would I really put a whole £20,000 ISA allowance in only one stock? Well, I would if it was a modest part of my entire wealth, and I already had a diversified set of stocks.
There are around 2,000 ISA millionaires in the UK now. One year’s allowance for them is only a small part of their cash.
I’ve known people in the past who put almost all their money into one stock, and then saw it crash. That was painful, even just watching them.
Dividend forecasts
Dividends are far from assured. M&G is unlikely to cover the cash by earnings this year and next, for example. But we’re in a down spell for the asset management business, as people are squeezed by inflation and interest rates.
In the long term, I think it’s a cash cow business. So I’d hope to keep getting good dividends in the decades ahead.
And future dividend ups and downs gives us another good reason to diversify. So, saying that, how could I snag some solid income from M&G shares, just as an example of what might be possible?
A £100k pot
To pocket £10,000 per year from a 10% dividend yield, well, that calculation isn’t too hard. I’d need a pot of £100,000.
How long might it take to build up that much? Suppose I plonk down my £20,000 now, and I keep on getting my 10% per year every year. And I don’t take the income yet, but I use it to buy more M&G shares.
It should take me 17 years at that rate to break through the £100k level. That’s a single £20k investment, with dividends reinvested, and not a penny of extra cash added. And it could multiply fivefold in 17 years.
Inspiration?
This does assume constant dividends, and a share price that stays the same. In the real world, those won’t happen. I could even lose money if my stocks underperform.
But do I find it inspirational to see how much I could earn by investing in high-yield dividend stocks for the long term? I really do.
