Here’s how investors can target a £15,882 yearly passive income from just £5 a day invested in this top FTSE dividend star!

FTSE 100 insurance and asset management giant M&G (LSE: MNG) is one of my core passive income stocks. This is money made with minimal effort from me, most notably in my view from dividends paid by shares.

Many people wrongly believe they need a large capital sum to start making such returns.

In fact, they can generate life-changing passive income for as little as the price of a fancy cup of coffee.

The power of £5 invested daily over time

Specifically, £5 saved and invested each day (£150 a month) in M&G shares will make £9,178 in dividends after 10 years.

This calculation uses the stock’s current average 7.6% dividend yield, with dividends reinvested back into it. This is a standard investment practice called ‘dividend compounding’.

On the same twin basis, the dividends will increase to £154,822 after 30 years.I see this period as a standard investment cycle beginning at 20 and ending perhaps in early retirement at 50.

At that point, this £5 daily investment will have created an M&G holding worth £208,972 (with the monthly deposits included).

And on the same 7.6% dividend yield, this would generate an annual passive dividend income of £15,882! None of this is guaranteed of course and investors could get back much less.

What’s the dividend yield outlook?

A stock’s dividend yield moves in the opposite direction to its price. This is provided that the annual dividend does not change.

In M&G’s case, a recent surge in the share price has seen its dividend yield drop from around 10% to where it is now. This largely resulted from Japanese financial powerhouse Dai-ichi Life taking a 15% shareholding in M&G. It expects the partnership to deliver at least $6bn of new business flows over the next five years.

A risk to the business is that the tie-up does not deliver the anticipated benefits.

However, consensus analysts’ forecasts are that M&G’s earnings will increase by a whopping 41% a year to end-2027. And it is ultimately growth here that powers any firm’s dividends and share price higher over time.

Indeed, analysts project that the firm’s dividends will increase to 20.6p this year, 21.3p next year, and 22p in 2027.

These would generate respective yields on the current £2.63 share price of 7.8%, 8.1%, and 8.4%.

Are further share price gains expected?

Price and value are not the same thing in stock market investment. The former is whatever the market will pay for a share at any given time. The latter is the true worth of the stock based on fundamentals for the underlying business.

Identifying mismatches between the two is the key to generating big, sustained profits over time, in my experience. And this comprises several years as a senior investment bank trader and decades as a private investor.

By far the best way of achieving this is through discounted cash flow modelling. This pinpoints where any firm’s share price should be, based on cash flow forecasts for the underlying business.

The DCF shows M&G shares are undervalued by 49% at their present price of £2.63.

Therefore, their fair value is £5.16.

Given this and its very high passive income potential, I will buy more of the stock as soon as possible.

The post Here’s how investors can target a £15,882 yearly passive income from just £5 a day invested in this top FTSE dividend star! appeared first on The Motley Fool UK.

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Simon Watkins has positions in M&g 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.