£11,000 of M&G shares could make me a passive income of £1,613 a month!

A small investment in M&G shares could generate a very high passive income for me, especially if the dividends are used to buy more of the stock.

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FTSE 100 global investment firm M&G (LSE: MNG) is one of my top stocks geared to maximising passive income (money made from minimal effort). And my aim is to use this to keep reducing my daily working commitments.

What are the current yield and forecasts?

In 2023, the firm paid a total dividend of 19.7p. This gives a yield on the current £2.03 share price of 9.7% — one of the highest returns of any FTSE index. By contrast, the present average FTSE 100 payout is just 3.5%, and the FTSE 250’s is only 3.3%.

Analysts estimate the dividend will rise to 20.1p by the end of this year, boosting the yield to 9.8%. And forecasts are that the payouts will be 20.6p in 2025 and 21.3p in 2026. These would give respective returns of 10.1% and 10.4%.

How much can the present yield make me?

£11,000 (the average UK savings amount) invested in M&G shares yielding 9.7% would make me £1,067 in dividend payouts this year.

Accordingly, even if the yield did not increase as predicted, this would rise to £10,670 after 10 years. On the same average 9.7% annual yield, it would jump to £32,010 after 30 years.

As good as these returns are, they could be even better by using a common investment method called ‘dividend compounding’.

By using this on the same average yield I would have £17,904 in dividend repayments after 10 years, not £10,670. On the same basis, I would have £188,576 instead of £32,010 after 30 years!

Adding in the initial £11,000 investment and my M&G shares would be worth £199,576 by that point. This would pay me £19,359 in passive income a year, or £1,613 every month!

Two other key factors in my share selection

None of those figures are guaranteed, of course. But a high yield is one of the three key qualities I want in my passive income shares. Another is that a stock should look undervalued compared to its competitors and to its future cash flows.

This reduces the chances that my dividend gains are wiped out by share price losses if I ever sell them.

In M&G’s case, its current price-to-book ratio of 1.3 is the lowest among its competitors, which average 3.6.

A discounted cash flow analysis shows it is 51% undervalued at its present price of £2.03. So a fair value for the shares would be £4.14, although it may go lower or higher, given the vagaries of the market.

The other quality I look for is that a firm has strong earnings growth prospects. It is these that power rises in dividends and share prices over time.

That said, a risk for the stock is the intense competition from rival firms and from less expensive index tracker funds.

However, analysts’ forecast that M&G’s earnings will increase a stunning 28.5% each year to the end of 2026.

My investment view

I bought M&G shares for their exceptional yield and extreme undervaluation, supported by excellent earnings growth prospects.

As nothing has changed in any of these respects in my view, I will be buying more shares very soon.

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.

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