Passive income from dividends can be a powerful motivator to invest. Take my stake in M&G (LSE: MNG) for example. The asset management company has a dividend yield of 9.8%. That means that, if I spent just £100 on the shares today, I would hopefully earn a £9.80 M&G dividend each year.
In fact, things could get even better than that.
The FTSE 100 firm’s policy is to aim or increase its dividend each year. The payout per share has grown annually since M&G was split off from Prudential in 2019. It has also bought back shares during that period, meaning it has been able to pay a bigger dividend per share while actually spending less overall in making those payments.
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But no dividend is ever guaranteed. M&G has a stated dividend policy that does not foresee a cut, but whether it can deliver that will ultimately depend on how the business performs in future.
Ongoing strengths – and challenges
I remain upbeat about the outlook for the firm. Indeed, that is why I continue to hold my shares.
Demand for asset management is high. The sums involved are substantial, so the opportunity for fees and commissions is substantial.
M&G’s retail client base stretches into the millions. On top of that, it has institutional clients too. Thanks to its geographic spread, well-known brand and long experience in asset management, I think it can set itself apart from rivals. That ought to be good for business performance.
Excluding its Heritage business, the firm saw net client flows of £1.1bn last year. In other words, more money came in than went out.
It generated almost £1bn of operating capital. I think that is impressive given its market capitalisation of £4.8bn. It also matters because generating capital is the bedrock of maintaining the M&G dividend.
That does not mean all is smooth sailing. One risk that concerns me is client outflows in the UK institutional business. That happened last year and could continue to occur due to shifts in the defined benefit pension market. A weak economy leading to retail customers pulling out funds could also hurt revenues and profits.
Promising dividend outlook
On balance though, I remain upbeat about the long-term outlook.
I am therefore hopeful that the M&G dividend will not only be maintained, but grow. On that basis, while the current yield is already juicy at 9.8%, the prospective yield could be even higher.
That puts M&G in the very top rank of FTSE 100 income shares, ranked by yield.
Since listing, the share price performance has been weak, with the shares declining in value by 11%.
But I like the passive income outlook here and have no plans to sell.
