An 8.4% forecast yield but down 16%! Time for me to buy more of this FTSE 100 passive income star?
The FTSE 100âs M&G (LSE: MNG) has been a core holding in my passive income portfolio for some years. These shares generate consistently big dividend returns for me with minimal effort (hence the âpassiveâ label).
It is a hybrid asset manager and life insurer, generating chunky, recurring cash flows from fees, annuities, and withâprofits business. And it consistently returns a large portion of all that to shareholders.
So how much could I make from the stock?
Consistent high-yielding gem
M&Gâs focus on rewarding shareholders was formalised last year with the adoption of a âprogressive dividend policyâ. Such a policy involves payouts rising at least in line with earnings per share but not being reduced if earnings decline.
Even before that, from 2020 to 2025 alone, dividends rose 12% from 18.23p to 20.5p. These delivered respective average annual dividend yields of 9.2%, 9.2%, 10.4%, 8.9%, 10.2%, and 7.2%. By comparison, the current FTSE 100 average dividend yield is just 3.1%.
M&Gâs 2025 payout of 20.5p gives a present dividend yield of 7.5%. However, much more is to come according to analysts.
Rising dividend forecasts
Earnings growth is the key driver for any firmâs dividends (and share price) over the long run. A risk or M&G is intense competition in its sector that may squeeze its margins over time. Another is any sustained spike in the cost of living that may prompt clients to close accounts. However, analysts forecast that its earnings will grow 22% a year to end-2028.And the projections are fordividend rises to 21.1p this year, 21.9p next year, and 22.9p in 2028.
These will generate respective annual dividend yields of 7.7%, 8%, and 8.4% — among the highest in any major FTSE stock.
How much dividend income?
Failing any problems, my £20,000 holding in M&G would make me £226,399 after 30 years. This is the end of a standard long-term investment cycle — starting with first investments around 20 and ending in early retirement options around 50.
The numbers are based on the average 8.4% forecast yield, although this can change over time. It also features the dividends being reinvested to harness the turbocharging power of âdividend compoundingâ.
After 30 years, the value of my holding (including the £20,000 initial investment) would be £246,399. And this would be paying me an annual income (from dividends) of £20,698!
Share price gains too?
A discounted cash flow (DCF) analysis identifies where a stock should trade by projecting future cash flows and discounting them back to today.
Some analystsâ DCF modelling is more bearish than mine depending on the variables used. However, based on my DCF assumptions â including a 9.4% discount rate â M&G shares are 58% undervalued at their current £2.73 price.
This suggests a âfair valueâ of around £6.50 — more than double where the stock trades today.
And because asset prices can trade towards their fair value in the long run, it suggests a potentially (if not guaranteed) superb buying opportunity to consider today if those DCF assumptions hold.
My investment view
M&Gâs strong earnings prospects should drive its share price and dividends much higher over time. Consequently, I will buy more of the shares very soon.
I also believe the firm merits the attention of other long-term investors seeking high longâterm passive income.
The post An 8.4% forecast yield but down 16%! Time for me to buy more of this FTSE 100 passive income 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.
