The FTSE 100 is filled with lucrative dividend shares. But following the recent stock market turmoil, many are now offering mouth-watering yields that seem too good to be true.
M&G (LSE:MNG) certainly seems to fall into this category with a shareholder payout now sitting at 10.3%!
However, while a high yield can be a sign to steer clear, every once in a while there’s an exception. And investors who capitalise on such rare opportunities can secure impressive passive income for the long run.
Should you invest £1,000 in M&G right now?
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With that in mind, let’s look at M&G and determine whether this firm should be on investors’ radar.
Investigating the double-digit yield
High payouts are rarely sustainable. Investors usually snatch up these opportunities, pushing the share price up and the yield down. Or they avoid like the plague because dividends will likely get cut. In the case of M&G, neither seems to be happening.
In fact, since its separation from Prudential in 2019, the group has maintained an impressive yield of over 9%, raising dividends every year. Yet, for whatever reason, investors aren’t buying its shares to capitalise on this, making the stock appear unusually cheap. In fact, looking at its latest full-year results, the underlying operating P/E ratio stands at just 1.2.
Does this make it a bargain income stock to buy? Not necessarily. There are a lot of moving parts involved. And the depressed valuation may be entirely justified.
As an investment services company, the group makes the bulk of its income by charging fees and selling financial products. That means the total assets under management (AUM) is an important metric to keep track of.
As of March, AUM stood at £344bn, up slightly compared to the end of 2022. While encouraging, that’s still significantly lower than the £370bn reported in 2021, highlighting the impact of recent stock market turmoil on M&G.
Pairing this market volatility with rising interest rates has compromised the fair value of the group’s annuity portfolio as well as other financial derivatives. The consequence is a massive collapse of net profits. In fact, net income in 2022 dropped from £92m to a loss of £1.6bn!
Taking a step back
Needless to say, if a company is losing that much money, dividends will undoubtedly get put on the chopping block. However, as horrific as this sounds, the reality is a bit more complicated. The losses incurred due to financial instrument impairment don’t affect cash flow.
Therefore, despite taking a massive loss on paper, the group’s liquidity position remains uncompromised. In fact, fees from its platform, management, and advisory services were up. And income earned from premiums on annuities and other financial products surged from £4.8bn to £6.5bn.
That certainly helps explain how management once again increased shareholder dividends without harming the balance sheet.
The bottom line
As dividends shares go, M&G is by far one of the most complicated. There are a lot of moving parts to keep track of, most of which are pretty challenging to follow. This is perhaps one of the reasons why it remains an unpopular stock among the investing community.
Personally, this obscurity through complexity doesn’t entice me to invest, even with a seemingly sustainable 10.4% yield.
But for those with a knack for following investment groups, M&G could be a lucrative source of passive income.
