To target £7,377 in annual passive income, how much should I invest in this FTSE dividend gem?

I think of passive income as money made while I sleep. Perhaps I got the idea from legendary investor Warren Buffett, who said: “If you don’t find a way to make money while you sleep, you will work until you die.”

Anyhow, the best way I have found of making money with little effort is through dividends paid by shares. The higher the better, of course, and the longer they persist even better than that.

Recently I added to my portfolio of such shares, based on three key factors — so what were they?

7%+ annual dividend yield

First, the stock – investment management giant Man Group (LSE: EMG) – has a projected yield of over 7%.

This figure is important to me, as it reflects compensation for the extra risk in investing in shares over no risk at all. And the current ‘risk-free rate’ (10-year UK government bond yield) is 4.6%.

Man Group’s current dividend yield has drifted below this level – to 6.5% — given a surge in share price recently. However, analysts forecast it will rise again this year to 7%, next year to 7.1%, and in 2027 to 7.6%.

This also compares very favourably to the present FTSE 250 average dividend yield of 3.5%. The FTSE 100’s is even lower – at just 3.1%.

So, Man Group passes this test for me.

Undervalued share price

I never sell my passive income stocks if they continue to perform as I think they should. However, if they do not, I would obviously prefer to make a profit if I do sell.

The chances of this happening are greatly improved in my experience if the stock is undervalued when I buy it. This means that there should be as big a gap as possible between its price and its ‘fair value’.

I have found over the years that the discounted cash flow method is the best way of pinpointing this difference.

In Man Group’s case, it shows the stock is 44% undervalued at its current £2.01 price.  Therefore, its fair value is £3.59.

Second test also passed.

Strong earnings growth

Handily for me, both the dividend and share price trajectories of any stock tend to be driven by one thing – earnings growth.

Risks to Man Group’s is a sudden change in global liquidity, interest rates, and/or geopolitical events. These can trigger rapid outflows in assets under margin and compress profit margins.

However, its 17 October Q3 trading statement showed a 22% year-on-year rise in assets under management to a record $213.9bn (£159.7bn).

Moreover, analysts forecast that its earnings will grow by a whopping 36% a year to end-2027.

Third test passed.

My investment view

Another £10,000 investment in the stock by me would generate £11,332 in dividends after 10 years. This is based on reinvesting the dividends back into the stock and a 7.6% average yield.

After 30 years on the same basis, this would rise to £87,066. Including the £10,000 investment, the total value would be £97,066.

And this would deliver a total annual passive income of £7,377.

Given it passed all three tests, I will be adding to my holding in the stock very soon.

I am also looking at several other high-yield shares that have caught my attention recently.

The post To target £7,377 in annual passive income, how much should I invest in this FTSE dividend gem? appeared first on The Motley Fool UK.

More reading

• 2 FTSE 250 shares that I think could easily beat the index in the coming year
• Here’s how investors could aim for £12,406 a year from £20,000 in this high-flying FTSE financial star

Simon Watkins has positions in Man Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

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