Stock market

£10,000 of shares in this FTSE 100 Dividend Superstar could make me £16,060 a year in passive income!

There are three main reasons for this. FTSE 100The financial sector is very attractive to me.

First, it was flagged (in my view, for no logical reason) after the 2016 Brexit decision. This value increased in the March/April 2023 mini-financial crisis.

Both ignored the massive capital-raising measures ordered by the Bank of England after the 2007 financial crisis.

Many stocks in the sector have not fully recovered, leaving them undervalued compared to their peers. Low-cost stocks are less likely to lose much value over time, which I like.

Second, given this low valuation, many are prime takeover targets for highly valued international firms. To mitigate this risk, they have increased dividends to try to support share prices. High dividends create great passive income, which I also like.

Third, most of these businesses look strong to me. That means earnings and profits are likely to grow over time, pulling the share price and profits higher, which I also like.

A case in point

FTSE 100 investment giant M&G (LSE: MNG) is a prime example of these factors.

Of course there are risks in stocks. One is its relatively high debt-to-equity ratio of around 1.9. The second is a real new global financial crisis.

However, its 2023 results showed a 28% increase in adjusted operating profit from 2022 — to £797m.

Operating capital also increased – up 21% year-on-year, to £996m – reaching a total of £1.8bn over 2022 and 2023.

The company expects to generate £1bn-£1.5bn of additional sales per year from the re-entering bulk annuity market in 2023. This is where companies provide insurance for other firms’ final salary pension schemes.

Overall, consensus analyst expectations are for M&G’s earnings to grow by 19% annually through the end of 2026.

Very little value

The firm also seems underpriced to me.

On the critical price-to-book (P/B) stock valuation measure, it currently trades at just 1.2. It is the lowest among all its peers, with an average P/B of 3.4.

How little is it worth? A discounted cash flow analysis shows the stock underperforms its competitors by about 48%.

So, with shares currently at £2.05, a fair value would be around £3.94.

There’s no guarantee they’ll reach that price, but it tells me how cheap they look.

What about the dividend yield?

In 2023, M&G’s dividend was 19.7pa a share. At the current share price, it yields 9.6%. It is among only a handful of companies paying out more than 9% in any FTSE index.

So, if I invested £10,000 in stocks, I would make an extra £960 in dividend payments this year. After 10 years on the same output, I’ll have another £9,600.

However, if I had reinvested the dividends paid back into the stock, I would have made a further £16,017 instead.

After 30 years of doing this with an average yield of 9.6%, I would have £176,113. That would pay me £16,060 a year or £1,338 a month!

Of course, profits can change – sometimes rise, but also fall.

Still, given its strong business, high yield, and low price, I’d be buying more M&G shares soon.

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