The appeal of dividends as a passive income stream is pretty straightforward for me. I can buy shares then sit back and watch in the hope of dividends piling up. One FTSE 100 share I own currently has a double-digit yield. Not only that, but if I had spare cash to invest now, I would consider adding to my position.
Let me dig into this income opportunity in more detail.
The stock in question is asset manager M&G (LSE: MNG).
M&G is a household name, which helps it attract and retain customers. I expect financial services to see robust customer demand over the long term, although there may be ups and downs along the way depending on how much spare cash people have to invest.
M&G is positioned to benefit from that thanks to its existing customer base and well-known brand. As asset management can involve large sums, even a relatively modest seeming commission can lead to healthy profits. Over the past two years, for example, the company’s post-tax profits totalled £1.2bn. That strikes me as a lot for a company with a current market capitalisation of £4.3bn.
Those profits were very unevenly distributed across the two years, however. That shows how the reported profits of a firm like M&G can be affected by moves in market valuations. In the long term I do not see that as worrying, although it can make it more challenging for an investor to decide what the fair value of an asset management firm is.
Challenging market conditions
M&G faces other challenges right now that could also affect its valuation. The UK asset management industry has fallen out of favour with many investors, who are worried about swings in markets and also unexpected sell-offs by some firms as we witnessed recently. That could hurt demand for asset management services if investors take fright.
At the half-year stage though, M&G raised its interim dividend from 6.1p per share last year to 6.2p this time round. That is a modest increase but struck me as a sign of management confidence. It also means that this FTSE 100 share now yields 10.2%, which I find very attractive. It also noted that its current solvency ratio underpins the company’s dividend policy of aiming to maintain or increase its annual payout.
The firm sounded a cautiously optimistic note on its outlook, including the ongoing turnaround in its wholesale asset management division. Even in the two months since the interim results, circumstances have become more challenging for financial service providers due to big swings in markets. But I think M&G’s business strategy, strong brand and established customer base could help it continue to do well in years to come.
I’d buy this FTSE stock
The wider market seems to have some doubts though, having marked down the M&G share price by 10% over the past year.
That fall is not nearly as bad as the decline seen over the past year at some other asset managers in which I have invested. abrdn and Jupiter are down 40% and 58% respectively, for example.
I think the fall does offer me an opportunity to increase my holding of M&G shares. If I had spare cash to invest now, I would do that.
C Ruane has positions in Jupiter Fund Management, M&G PLC, and abrdn. The Motley Fool UK has recommended Jupiter Fund Management. 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.
Motley Fool UK 2022