A 9.5% yield now from this undervalued FTSE passive income star!

This FTSE 100 firm posted good H1 results, looks undervalued to its peers, and has a 9.5% yield to generate big passive income streams.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 contains many stocks with a sufficient yield to generate significant passive income. Yet there are very few that pay over 9%. However, global investment manager M&G (LSE: MNG) is one of the few.

And until its share price spiked on better-than-expected H1 results, it even yielded over the magic 10% level. This rate allows investors to double their initial investment if it is sustained for 10 years.  

Created with Highcharts 11.4.3M&g Plc PriceZoom1M3M6MYTD1Y5Y10YALL2 Jan 202327 Sep 2023Zoom ▾Feb '23Mar '23Apr '23May '23Jun '23Jul '23Aug '23Sep '23Mar '23Mar '23May '23May '23Jul '23Jul '23Sep '23Sep '23www.fool.co.uk

My starting point in selecting companies for consideration in my high-yield portfolio is naturally enough the dividend. But there are two other factors I look at before as stock makes the cut.

Should you invest £1,000 in Centrica right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?

See the 6 stocks

The first is how the core business looks. The second is the share valuation, as I do not want my dividend returns wiped out by stock losses.

These are always possible in any company and there are risks in this one as well, of course. The ongoing cost-of-living crisis may affect client inflows, for example. And there may be another financial crisis at some point, which might make trading profits more difficult to generate.

Share valuation

M&G’s shares are still down around 10% from their high this year, despite the recent bounce on good H1 results.

This does not mean that the firm is undervalued though. It may simply be that the business itself is just worth less now than it was before.

To get a better idea of its true value, I compared its price-to-book ratio (P/B) with those of its peers.

M&G currently trades at a P/B of 1.2. This is lower than all its immediate peers except one — RIT Capital Partners at 0.8. Burford Capital trades at 1.6, Curtis Banks Group at 3.3, and St. James’s Place at 3.6. 

These figures strongly suggest to me that M&G is significantly undervalued compared to its peers.

Core business

H1 results showed adjusted profits before tax increased 31% to £390m against the same period last year. This compared to consensus analysts’ expectations of just £284m.

Operating capital generation also rose over the same period — by 17% to £505m. This means that the company remains on track to generate its target £2.5bn in operating capital by December 2024.

Additionally positive for me is that its Shareholder Solvency II coverage ratio remained strong, at 199%. A ratio of 100% is the regulatory minimum for the industry.

Passive income

In its full-year 2022 results, it declared a total dividend of 19.6p. On the current share price of £2.07, this gives a yield of 9.5%.

If this remained over 10 years, then a £10,000 investment now would make £950 per year in passive income.

At the end of that period, an investor would have made an additional £9,500 to add to their initial £10,000.

This return would not include further gains from any reinvestment of dividends or share price appreciation. Conversely, there would also be tax liabilities, of course, and perhaps share price losses to factor into the net return.

I already have holdings in the sector. But even with these, I am seriously thinking about buying M&G shares. I believe the losses in the share price are unwarranted and will be reversed over time. I also expect it to stick to its history of very high yields.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Burford Capital and M&g Plc. 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.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »