For those looking to generate passive income, buying high-quality shares with high yields can be a lucrative strategy. One such opportunity is M&G, a stock listed in the London Stock Exchange’s FTSE 100 index. With a yield of just over 10%, M&G is positioned at the top of the index’s payout leaderboard.
While there are risks associated with investing in the company, such as the ongoing cost-of-living crisis and the potential for a future financial crisis, M&G’s core business suggests that high yields may be sustainable. Additionally, the stock is currently trading at a 15% discount from its high earlier this year.
The decline in M&G’s stock price can be attributed to external factors rather than any inherent issues with the company itself. Rumors of troubles at Silicon Valley Bank sparked fears of a new financial crisis, which affected the stock. However, new rules to strengthen UK financial firms’ balance sheets have been implemented since the last financial crisis, mitigating the impact on M&G.
Another factor that contributed to the decline in M&G’s share price was concerns about the impact of new accounting rules. However, the company has reassured investors that these rules will not affect its strategy, solvency position, capital management framework, or dividend policy. M&G remains committed to achieving its financial targets.
M&G’s 2022 results demonstrate a solid core business, with operating capital of £821m and an improved underlying capital generation of £628m. The company also maintains a strong Shareholder Solvency II coverage ratio of 199%, providing robust protection against insolvency. Furthermore, its wholesale asset management business saw net inflows of £1bn in Q1 2023.
In terms of passive income, M&G declared a second interim dividend of 13.4p per share in its 2022 results, resulting in a total payout of 19.6p when combined with the first payment of 6.2p. With the current share price at £1.95, this translates to an annual yield of 10.05%. Even with an average yield of 10% over 10 years, a £10,000 investment could generate £1,000 per year in passive income, potentially doubling the initial investment.
While there are considerations such as tax liabilities and potential share price falls, the discounted price of M&G shares presents an attractive opportunity for investors seeking passive income. The losses in the share price may be unwarranted and could reverse over time, while the company’s track record of paying healthy yields bodes well for future payouts.
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