I’m a fan of dividend shares because they provide a more tangible return than growth stocks. I can extract value from my investment without selling any shares and reducing my holdings.
Plus, I always have the option to reinvest the dividends if I wish to grow my portfolio further. It gives me more control over how I choose to direct my investments.
The caveat is that many dividend shares struggle to increase in value. The focus on returning value to shareholders limits funds for expanding operations. Consequently, the share price of many dividend stocks tend to trade sideways — or worse, decline.
So if I find a high-yielding dividend stock with a rising price, I’m compelled to investigate further. That’s what I see now with MNG (LSE: M&G), a 100+ year old London-based investment management firm.
M&G
M&G was acquired by Prudential in 1999 but demerged again in 2019. So far, it has struggled to make an impact, with the stock down 4.5% since listing.
Industry-wise, the UK asset management sector suffered an average annual share price decline of 15% over the past three years (according to RBC Capital Markets). Rising interest rates, increased competition and economic uncertainty have all weighed on valuations.
But that could be changing soon.
Rival asset managers Schroders and aberdeen are both up by around 23% this year since publishing their final results.
M&G is only up 7.7% year-to-date but will publish its results next week. After last year’s final results the share price fell 17%, despite solid numbers that included a 28% increase in pre-tax profits.
So I’m hesitant to jump in ahead of the next results – not without some reassurance, at least.
Let’s have a look.
Growth prospects
M&G has been focusing on cost efficiency and capital discipline, helping it navigate volatile markets. However, like many asset managers, it faces pressure on fee income and client outflows as investors seek lower-cost passive funds.
Considering the pressures on the asset management industry, expectations for the upcoming results could be dampened. As a result, they are less likely to be missed, which was a contributing factor last year.
But that also means there isn’t much hope of gains this year.
Analyst opinions vary, ranging from Buy to Hold, with the consensus target price around £2.30. This indicates a cautiously optimistic outlook with an expectation of around 8.3% growth in the coming year.
Taking that into account, dividends are the most compelling prospect for me right now. But although the 9.5% yield is attractive, it doesn’t tell the whole story.
With earnings per share (EPS) currently at less than half the dividends per share, the company’s payout ratio is over 200% — not a very sustainable level. If earnings don’t improve drastically, the company might have to cut dividends.
For me, that makes it too risky. Until I see evidence of consistent growth to back up the dividend payments, I wouldn’t consider the stock.
Other options
Fortunately, M&G isn’t the only high-yield dividend stock on the FTSE 100. Other options with low payout ratios include Vodafone, with a 7.8% yield and Aviva, with a 6.4% yield. Bother are worth researching, I feel.
No matter the yield of ratio of a dividend share, it’s always important to fully evaluate a company’s financial health when considering investing.
This post was originally published on Motley Fool
