I’d spend £3,000 on these dividend shares to aim for £275 in passive income annually
Owning dividend shares can be a lucrative way to build additional income streams. One such share currently offers a 9.2% yield, meaning that if I invested £3,000 into it today, I would hopefully earn around £275 a year in dividends.
Not only that, but it has a recent track record of dividend growth.
Well-known financial services company
The firm in question is M&G (LSE: MNG), a familiar name to many, thanks to its longstanding position in the asset management industry.
From an investor’s perspective, that makes it attractive in several ways. While demand for financial services may ebb and flow, over the long term I expect it to be robust. Millions of people want to invest their money and try to build a nest egg. The same is true for institutions, such as pension funds and charities, which also want to put their money to work.
Having deep industry experience and a well-recognised brand are strengths that help give M&G a strong competitive position within that arena. Those attributes can help increase customer loyalty and attract new investors to spend money with the firm.
M&G investment case
Despite that, the yield on these FTSE 100 dividend shares looks pretty high to me.
The company has a policy of aiming to maintain or increase its dividend annually. If it is able to deliver on that – which is not guaranteed – then putting £3,000 into the stock today might net me more than £275 each year down the line in dividend income.
That yield suggests there may be some notable risks though. Asset managers in general are a bit out of favour right now, as a worsening economy threatens to mean clients withdraw funds, hurting profits. That explains yields like Abrdn’s 7% as well as M&G’s, in my opinion.
Another risk is swings in profitability. In the first half, for example, the company swung to a loss of £1bn. To keep paying out handsome profits, it needs to generate cash to pay them.
I see such swings in profitability as part and parcel of the asset management industry, as the reported profits and losses partly reflect moves in market prices of a firm’s assets.
M&G seems upbeat about its business outlook, having returned to net client inflows in its wholesale asset management division. It has also spent half a billion pounds buying back its own shares over the past year, which I see as a sign of management confidence.
I already hold M&G in my portfolio, but I continue to see value at the current share price. The interim dividend was raised and I am optimistic that we will also see a small increase at the full-year level when final results are announced on 9 March.
If I had spare cash to invest today building a diversified range of dividend shares, I would be happy to put £3,000 into M&G.
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C Ruane has positions in Abrdn Plc and M&g Plc. The Motley Fool UK has no position in any of the shares mentioned. 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