£10,000 of shares in this FTSE 100 dividend superstar can make me a £16,060 annual passive income!

This FTSE 100 gem appears set for strong growth, looks undervalued to me, and pays a 9%+ dividend yield that can make me big passive income.

| 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.

A pastel colored growing graph with rising rocket.

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.

There are three key reasons why the FTSE 100’s financial sector is so appealing to me.

First, it was marked down after the 2016 Brexit decision (for no logical reason, in my view). This devaluation increased in the mini-financial crisis of March/April 2023.

Both overlooked the huge capital-boosting measures ordered by the Bank of England after the 2007 financial crisis.

Should you invest £1,000 in Kier Group Plc 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 Kier Group Plc made the list?

See the 6 stocks

Many stocks in the sector have not fully recovered, leaving them very undervalued against their peers. Undervalued stocks are less likely to lose more value over time, which I like.

Second, given this undervaluation, many are prime takeover targets for more highly-valued international firms. To mitigate this risk, they have raised dividends to try to support share prices. High dividends generate big passive income, which I like as well.

Third, most of these businesses look strong to me. This means earnings and profits are likely to increase over time, pulling the share price and dividends higher, which I also like.

A prime case in point

FTSE 100 investment giant M&G (LSE: MNG) is a prime example of these factors at play.

There are risks in the stock, of course. One is its relatively high debt-to-equity ratio of around 1.9. Another is a genuine new global financial crisis.

However, its 2023 results showed a 28% rise in adjusted operating profit from 2022 — to £797m.

Operating capital also rose — by 21% year on year, to £996m – taking the total to £1.8bn over 2022 and 2023.

The company expects to generate £1bn-£1.5bn of additional sales each year from the booming bulk annuity market it re-entered in 2023. This is where companies provide insurance for other firms’ final salary pension schemes.

Overall, consensus analysts’ expectations are that M&G’s earnings will grow at 19% a year to the end of 2026.

Very undervalued

The firm also looks undervalued to me.

On the key price-to-book (P/B) stock valuation measurement, it currently trades at just 1.2. This is the lowest of all its peers, the average P/B of which is 3.4.

By how much is it undervalued? A discounted cash flow analysis shows the stock to be around 48% undervalued against its competitors.  

So, with the shares currently at £2.05, a fair value would be about £3.94.

Created with Highcharts 11.4.3M&g Plc PriceZoom1M3M6MYTD1Y5Y10YALL13 May 201913 May 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

There is no guarantee they will reach that price, but it underlines to me how cheap they look.

What about the dividend yield?

In 2023, M&G’s dividend was 19.7p a share. On the present share price, this gives a yield of 9.6%. This puts it among just a handful of companies in any FTSE index paying over 9%.

Therefore, if I invested £10,000 in the stock, I would make an additional £960 in dividend payments this year. After 10 years on the same yield, I would have another £9,600.

However, if I reinvested the dividends paid back into the stock, I would have made another £16,017 instead.

After 30 years of doing this with an average 9.6% yield, I would have £176,113. This would pay me £16,060a year in dividends or £1,338 a month!

Of course, dividends can change — rising sometimes, but falling too.

Yet given its strong business, high yield, and undervaluation, I will be buying more M&G shares shortly.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

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 positions in M&g Plc. The Motley Fool UK has recommended 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

Investing Articles

Is the US stock market set to crash in April?

Panic about a looming stock market crash is spreading, but what could be the tipping point? And what can investors…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

As the stock market has a meltdown, I’m listening to billionaire Warren Buffett

Our writer has been following Warren Buffett in recent weeks by repositioning his portfolio to take advantage of the market…

Read more »

Investing Articles

How much would an investor need in an ISA for a £100k passive income?

Zaven Boyrazian breaks down how much investors need to put aside each month to potentially earn a six-figure tax-free passive…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

In my opinion, this FTSE growth stock looks set to soar over the next 5 years!

Our writer thinks this UK growth stock could benefit from the current excitement surrounding artificial intelligence applications.

Read more »

Investing Articles

0.45x EV-to-EBITDA: this is the cheapest UK stock, IMO

This UK stock has come under increasing pressure in recent weeks, but I don’t think it’s warranted. Here’s a closer…

Read more »

Investing Articles

Can the Rolls-Royce share price hit £13 in the coming year?

After a stunning couple of years for the Rolls-Royce share price, can it keep up its recent momentum? This writer…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Here’s how a £20k ISA could produce £1,580 of passive income in the next year

A Stocks and Shares ISA stuffed with dividend shares can be a lucrative source of passive income. Christopher Ruane explains…

Read more »

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »