High dividend yields aren’t uncommon, but the higher they go the less sustainable they tend to be. Now, as inflation rises in the UK, investors like me are under pressure to continue earning a good return on their money. Inflation has reached three-decade highs of 5.5%. The Bank of England (BoE) predicts that it will reach 7.25% in the spring.
But I’m not panicking. There are lots of UK companies with dividend yields above even this high level of inflation. The one I’m considering is even on the FTSE 100. It’s M&G Financial Services (LSE: MNG).
A little background
M&G was a subsidiary of Prudential, a financial services conglomerate, but was split off in late 2019. This was part of Prudential’s strategy to concentrate on Asia’s fast-growing developing markets. I do not believe for a moment that Prudential’s decision to split from M&G is a reflection of the latter’s earnings prospects. In my opinion, M&G has the potential to provide significant long-term shareholder returns.
Since the 2008 financial crisis, ordinary financial products have provided a poor return to savers. To aid the revival of the economy, the Bank of England held rates at historic lows. Savers and investors have had to look for other ways to get a reasonable return on their money and demand for wealth management services, such as those provided by M&G, rose as a result.
The Bank of England is boosting interest rates once more. However, this has yet to be reflected in a significant increase in savings rates. Interest rates are expected to continue substantially below historical averages. I don’t anticipate things to get much better for savers. Even in the most optimistic scenario, interest rates will remain below 1.8% until 2024, according to Lloyds.
Set apart from the rest
I wouldn’t only buy M&G because typical savings products are expected to continue to provide weak returns. The FTSE 100 company has a long history of competently delivering financial solutions for seniors. This could create significant profits in the years ahead. The population of the UK is ageing, with one-in-six expected to be 65 or older by 2050, leaving M&G and its competitors with plenty of business to win.
M&G will still have to put in a lot of effort considering the level of competition it faces. The financial services business is tough, and any evidence of underperformance compared to competitors might be disastrous. However, I think I can rest easy knowing that M&G has a proven track record of providing good returns to its customers.
8.5% dividend yield
Furthermore, when it comes to reward-to-risk, I believe M&G’s stock price seems very appealing at current levels. The wealth manager is now trading at a forward P/E ratio of 10.3 times, which is close to the recognised value watermark of 10 times.
But for me, the biggest draw is its dividend yield. Right now, it pays a whopping 8.5%, miles above the FTSE 100 average of 3.5%. This is a stock I’m purchasing today and holding for a long time.
James Reynolds has no position in any of the shares mentioned. 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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