Income investors are always on the eye out for high-yielding dividend stocks, particularly those on the FTSE 100. These blue-chip stocks typically have a solid balance sheet and high cash flow, making dividends more reliable. So when a new stock took top spot for yields on the index, I had to check it out.
A big yield
Global investment manager M&G (LSE: MNG) recently moved above Phoenix Group to secure its spot as the highest-yielding stock on the Footsie. In late March, Phoenix fell below 10% for the first time in a month as its share price rose sharply.
Now, M&G’s experienced the opposite — a sudden price dip that sent its yield soaring. It also recently announced its final year dividend, up 2% from last year. Together, those factors typically make for a compelling investment case: a low price and high yield.
But there may be more to the story.
A dividend newcomer
The problem with dividends is that they’re never guaranteed and can be cut or reduced at any time. Currently, M&G looks attractive because its paying 20.1p on each £1.99 share. But dumping that much cash on shareholders every year comes at a high cost — and when money gets tight, dividends can get cut.
That’s why it’s critical to check a company’s track record when shopping for dividend stocks. Companies that adhere to a strict dividend policy typically have at least 10 years of solid growth with no cuts.
Being a relatively new company, M&G only has a six-year history of dividend growth. I wouldn’t write if off completely — every top dividend payer has to start somewhere — but it makes it harder to trust.
So let’s see if it can maintain that growth.
Risk and figures
A key issue M&G is facing lately is customer outflows, which amounted to £1.9bn in the latest 2024 results. That’s in stark contrast to the inflows of £1.7bn enjoyed the year before.
This may partly be because many of its pension fund clients are rebalancing capital from stocks into bulk purchase annuities (BPAs). This trend is driven by stubbornly high inflation amid an improving economy. If M&G can’t gain more exposure to this market, it may suffer further outflows.
Yet it still managed to report a 5% increase in operating profit in 2024 and reiterated its dedication to shareholder returns. It also increased guidance for 2025, raising its cumulative savings target by 15% from £200m to £230m.
With that kind of confidence, I’d expect better analyst ratings, but the average 12-month price target is only 233p — a 16.7% rise. Still, JP Morgan put in an Overweight rating on the stock last week with a price target of 275p. That would equate to almost a 50% capital gain when adding in dividends. Not a bad return!
So despite the risks, I think M&G’s a stock worth considering for passive income in 2025. A yield above 10% is a rare find on the FTSE 100, particularly when backed by a company with promising growth potential.
This post was originally published on Motley Fool
