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FTSE 100 Full of attractive dividend stocks. But after the recent turmoil in the stock market, many are now offering mouth-watering yields that sound too good to be true.
M&G (LSE:MNG) certainly seems to fall into this category, with its shareholder payout now at 10.3%!
However, although high yields may be a sign to stay away, there is the occasional exception. And investors who take advantage of such rare opportunities can secure impressive passive income over the long term.
With that in mind, let’s look at M&G and determine whether this company should be on investors’ radars.
double digit yield check
High payouts are rarely sustainable. Investors typically seize on these opportunities, driving up the stock price and driving down yields. Or they avoid it like the plague because of the possibility of a dividend cut. In the case of M&G, this does not appear to be happening.
In fact, since the separation Prudential In 2019, the group has maintained an impressive yield of over 9% while increasing its dividend every year. Yet, for whatever reason, investors aren’t buying shares to take advantage of this, making the stock appear unusually cheap. In fact, looking at its latest full-year results, the underlying operating P/E ratio is just 1.2.
Does this make buying it a profitable deal? not necessarily. There are a lot of moving parts involved. And the dropped valuation may be entirely justified.
As an investment services company, the group earns the bulk of its income by charging fees and selling financial products. This means that total assets under management (AUM) is an important metric to keep an eye on.
As of March, AUM stood at £344bn, slightly higher than at the end of 2022. While encouraging, this is still well short of the £370bn reported in 2021, highlighting the impact of the recent stock market turmoil on M&G.
This market volatility coupled with rising interest rates has compromised the fair value of the group’s annuity portfolio as well as other financial derivatives. The result is a sharp drop in net profit. In fact, net income is set to drop from £92m to a loss of £1.6bn in 2022!
taking a step back
Needless to say, if a company is losing that much money, the dividend will undoubtedly be cut. However, as sinister as it sounds, the reality is more complex than that. Losses due to impairment of the financial instrument do not affect cash flows.
Hence, despite incurring huge losses on paper, there is no compromise on the liquidity position of the group. In fact, the fees for its platform, management and advisory services had gone up. And premium income on annuities and other financial products rose from £4.8 billion to £6.5 billion.
It certainly helps explain how management once again increased shareholder dividends without hurting the balance sheet.
Bottom-line
As dividend stocks 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 quite challenging to follow. This is probably one reason why it remains an unpopular stock among the investment community.
Personally, this ambiguity through complexity does not entice me to invest, even with a sustainable yield of 10.4%.
But for those with the ability to follow investment groups, M&G can be a lucrative source of passive income.
Post 10.3% yield! Buy September 1 FTSE 100 Dividend Shares? appeared first on The Motley Fool UK.
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Zven Boyarjian has no position in any of the stocks mentioned. The Motley Fool UK recommends M&G plc. The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023
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