The first question most investors ask when they see a FTSE 100 dividend share yielding almost 10% is whether it’s sustainable.
Arguably, it’s a rhetorical question. The assumption is that it isn’t. Too many double-digit yields have met their maker. The biggest of them all, Vodafone Group’s 10.28% stonker, will be slashed in half next year.
So when I started building a stake in wealth manager M&G (LSE: MNG) last autumn, I approached its ultra-high yield with extreme caution. The M&G share price performance wasn’t much to tempt me, having floundered since being spun off from Prudential in 2019.
Top income stock
Yet that almighty yield proved irresistible. Especially since I thought there was a good chance the share price would recover once undervalued UK stocks like this one finally got a re-rating.
I was right about the dividend. M&G paid me a bumper £408.27 on 5 May. I immediately used it to buy more shares in the stock, which will hopefully pay me yet more dividends in future.
For a while, I was celebrating the rising M&G share price too. At their peak, my shares were climbing nicely but then went into reverse. So I’m back where I started, share-price-wise (although I get to keep that dividend).
I’d hoped for better. Especially with M&G posting a 28% increase in full-year 2023 profits to £797m on 21 March. Markets knew they would be good, guessing at £750m, but not that good.
M&G turned a £2.1bn IFRS accounting loss into a £309m profit before tax, as it delivered “meaningful improvements across key financial metrics”. The share price jumped on the day, but since then it’s all been downhill. While the FTSE 100 rallied to new all-time highs, this stock went the other way. So what went wrong?
Equity market recovery play
Thankfully, the dividend hasn’t been cut. However, the total 2023 payout of 19.7p was increased by just a 10th of a penny from last year. Personally, I thought that was fine, given the size of the yield, but it does suggest a certain caginess on behalf of the board.
I think the other issue is down to the market rather than M&G. As interest rates look set to stay higher for longer, so do yields on cash and bonds. This means investors can get a decent rate of income without worrying about the impact of share price movements on the capital.
This has hit other high-yielding dividend shares in my portfolio, notably Legal & General Group and Phoenix Group Holdings. So it’s not just M&G.
M&G could be a value trap, but I don’t think so. I suspect investors will look more favourably on its outsize income potential when interest rates peak, and yields on cash and bonds retreat. Rate cuts should also boost global stock markets, boosting the group’s customer inflows and net assets under management. When this happens, M&G could enjoy a little bull run of its own.
Even if this rosy scenario doesn’t pan out, I’m still getting a bumper yield. Assuming it holds. I think it will but, as ever, there are no guarantees.
The post 9.82% yield and 28% profit growth! I think this FTSE dividend share is due a bull run appeared first on The Motley Fool UK.
Should you buy M&G now?
Don’t make any big decisions yet.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.
And he believes they could bring spectacular returns over the next decade.
Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…
When such enormous changes hit a big industry, informed investors can potentially get rich.
So, with his new report, Mark’s aiming to put more investors in this enviable position.
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Could the 9.8% M&G dividend yield get even bigger?
9%+ yields! Here are 2 of the best FTSE 100 dividend shares to consider buying
£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!
These are the most popular 2024 Stocks and Shares ISA picks so far
£10k in an ISA? How does £840 passive income a year sound?
Harvey Jones has positions in Legal & General Group Plc, M&g Plc, and Phoenix Group 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.