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How much passive income could £3k earn in the stock market? At the moment, the FTSE 100 index of leading British companies offers a dividend yield of 3.1%. That would mean around £93 of passive income per year in the form of dividends.
But that yield is only an average – and some FTSE 100 shares actually offer a much higher one. For example, asset manager M&G (LSE: MNG) comes in at twice the FTSE’s yield. It currently offers 6.2%.
Strong dividend deliverer
That means on a £3k investment it ought to pay £186 a year in dividends. In fact, the payout may be richer than that in practice. M&G’s stated dividend policy is to grow its dividend per share annually.
The company has delivered on that goal in recent years. However, it is worth noting that the interim dividend per share this year, at 6.8p, was only 0.1p higher than last year.
Yes, that is growth – but it is minimal growth and points to the fact that cash dividends paid to equity holders in the first half, at £328m, represented 88% of the company’s operating capital generation for the six-month period.
One way of looking at that as an investor is to applaud M&G for returning so much of its surplus capital generation to shareholders in the form of dividends.
But another way of looking at it (in the context of the minimal increase) is that coverage is becoming thinner. If the business enters a rougher patch and operating capital generation falls, that raises a question about how sustainable the current dividend may be, let alone dividend growth.
A strong business with good prospects
We could be entering a rough patch. After all, turbulent equity markets can lead policyholders to take more out of funds than they put in, potentially hurting profits for an asset manager like M&G.
The company has indeed struggled with that in recent years. However, the first half saw £2.4bn of net inflows to its open business, meaning more money was put in than pulled out.
A trading update this month suggested that that trend has continued and perhaps even accelerated, as the third quarter saw net inflows of £1.8bn. Even in this market, M&G seems to be performing well on this metric.
Despite the risks, I appreciate M&G’s strong brand, customer base in the millions across multiple markets and proven strong cash generation potential.
Worth considering for the income opportunity?
Above, I used the example of how many M&G shares £3k would buy. I was presuming that was part of a diversified portfolio, as it is never a wise idea to put a whole portfolio into a single share.
Within that context though, I think M&G is a worthwhile share for investors looking to try and earn strong passive income streams to consider right now.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
