One of the attractions of owning FTSE 100 shares at the moment is some of the high yields on offer. Take asset manager M&G (LSE: MNG) as an example. It has a dividend yield close to 10%.
Can that last – and does it make sense for me to buy the shares primarily for their income potential?
Sustaining the dividend
No dividend is ever guaranteed. That recognised, M&G does have a policy of aiming to maintain or increase its dividend each year.
This year, for example, saw a 4.8% increase at the interim stage. Last year, the full-year dividend rose 7.1%.
To keep growing (or even maintain) its dividend over the long run, the firm needs to continue generating enough cash. The company has proven its cash generation potential. Last year, not only did it pay out a chunky dividend, it also spent half a billion pounds buying back its own shares.
Set for growth
Can M&G keep generating sizeable free cash flows in future?
It has a well-known brand, customer base stretching to millions of clients in several dozen markets and can benefit from ongoing high demand for asset management.
So far this year, business has been strong. In the first half, the firm saw a net client inflow of funds (excluding its Heritage business) of £0.7bn. It generated over half a billion pounds of capital.
Set against that, demand for financial services is high over the long run but can fluctuate. Choppy markets might lead investors to pull money from funds, for example, hurting revenues and profits for service providers like M&G.
Beyond the dividend
Despite the risks, I would be happy adding more M&G shares to my portfolio if I had spare cash to invest. I say ‘more’ because I already own shares in the FTSE 100 company.
But while the dividend yield is certainly attractive at 9.8%, is that the only reason to own the shares? What about the prospects for capital growth?
The track record here is unremarkable. The M&G share price has moved up 6% in the past year. Since it listed in 2019, the shares have lost 10% of their value.
Past performance is not necessarily a guide to what may happen in future though. With a market capitalisation of £4.8bn, I consider the business to be attractively valued given its strengths.
The long-term trend of a falling share price may continue. But I am hopeful the reverse will be the case and M&G shares rise in price over time.
I’d keep buying
I like the business, I like the valuation, I like the potential for capital growth and I certainly like the blockbuster dividend yield.
So I plan to hold my M&G shares and look forward to hopefully receiving ongoing passive income streams from them. If I had spare cash to put to work in the stock market, I would be happy to buy more of the shares today.
