I’d buy this income stock in an ISA for its magnificent 10%+ yield
The ISA deadline is exactly three weeks away (5 April), and I’m hoping to add a FTSE 100 income stock or two to my portfolio. This one jumped right out at me, thanks to its supersized yield.
Investment manager M&G (LSE: MNG) has had a bumpy time since it was hived off from insurer Prudential in 2019. It’s had a baptism of fire, having to navigate the pandemic and a troublesome 2022 in just a few short years.
That’s an incredible yield
Its shares are down 8.32% over the past year, although that’s hardly surprising, given recent stock market volatility. Fellow FTSE 100 fund manager Schroders is down 13.65% over the same period.
The difference is that M&G has recovered lately, its shares rising 12.77% over three months. Schroders hasn’t.
I prefer investing in shares when they are down in the dumps, rather than riding high. Given that I aim to hold the stocks I buy for a minimum 10 years, that allows plenty of time for my cut-price buy to prove a genuine bargain.
M&G sprang to my attention because of its magnificent dividend, which currently yields 9.86% a year. Only NatWest yields more on the entire FTSE 100.
Unfortunately, sky-high yields have a habit of proving unsustainable. A few months ago, housebuilder Persimmon yielded almost 20%, with mining giant Rio Tinto paying 12%. Both dividends have since been slashed (although they still yield a respectable 7.17% and 4.88% today).
If I bought M&G today, the yield held and I reinvested all my dividends, I would double my money in less than eight years. If the share price grew as well, I’d treat that as a bonus.
So is it sustainable? To my surprise, I think it might be. Management is committed to rewarding shareholders, judging by last week’s final results. M&G returned almost £1bn to loyal investors in 2022, via £465m of dividends and a £503m share buy back.
M&G is committed to dividends
It paid a total dividend of 19.6p per share in 2022 “in line with our policy of stable or increasing dividends”. That’s up from 18.3p in 2021, an increase of 7.1%. It did so even though the yield was already huge. That’s commitment.
M&G’s results included a section headed Priorities for 2023. Right at the top it named “delivering superior returns through attractive dividends and earnings growth”. Management does seem to be putting investors first.
Words are words, the payout also has to be affordable. M&G’s dividend capacity is linked to the value of available capital in its subsidiaries, which management reckons is “strong”.
However, capital generation plunged last year, falling from £1.87bn in 2021 to a loss £397m. Despite that, its shareholder Solvency II coverage ratio remains strong at 199%. I was happy to see that M&G is on target to generate £2.5bn of capital this year.
No dividend is safe, especially one this big. Yet management would lose an awful lot of face if it fails to follow through on its strategy, and will no doubt be working flat out to increase shareholder payouts this year too.
There is a risk in buying M&G shares for income, but I think it’s one worth taking. I hope to add it to my portfolio before 5 April.
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Harvey Jones has positions in Persimmon Plc and Rio Tinto Group. The Motley Fool UK has recommended Schroders 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.
Motley Fool UK 2023