I like dividend-paying shares because the extra income can come in handy. Whether I spend it or reinvest it, dividend income is an important part of my investing strategy. So I’m always hunting for UK shares that offer an attractive dividend yield.
Below I discuss one 7%+ yielding stock I’d consider picking for my portfolio.
High-yield UK shares
The stock in question is FTSE 100 member M&G (LSE: MNG), a well-known financial services provider in the UK.
It was demerged from Prudential in 2019. I think due to its newness as an independent listed company, analysts have struggled to value it. That could explain why its yield has been among the highest in the FTSE 100.
The company is best known for its asset management business. Last year, assets under management and administration rose 4% to £367bn.
M&G dividend
The company announced in March that it would raise its dividend. The payout for the full year came to 18.23p per share, made up of a 6p interim dividend and 12.23p final one. At the current share price, that’s a 7.7% yield. Among UK shares, I find that attractive.
The M&G share price doubled in the past year. So today’s 7%+ yield looks attractive to me, but if I had got in this time last year I would now be looking at a yield of 15%. That’s far ahead of the market average. Is that a red flag?
One reason these UK shares were marked down last year was the brevity of the company’s dividend history. But another was concern about how the asset management industry would fare. Amidst the economic downturn last year, it was unclear what the outlook would be for a company like M&G.
I think that risk remains for an investment management firm such as M&G. If an economic downturn leads to less customer appetite for investments, revenues and profits could fall.
M&G dividend sustainability
One of the things I look at when a company has a high dividend is its sustainability.
For the past couple of years, the dividend has been covered more than twice by earnings. The dividend was also covered by free cash flow. The company structure makes for a slightly complicated calculation, but it highlights cash remittances of £737m last year. That more than covered the cost of the dividend, at £562m.
The disparity between revenues and earnings reflects the structurally low profit margins of the investment management sector. But for now, I see no reason why the dividend could not be supported in the future. However, dividends are never guaranteed. A shift in profitability could cut the company’s ability to pay out dividends, for example because of a more competitive landscape in investment management.
Would I buy these UK shares?
The M&G yield is attractive to me. I like the company’s strong brand and its commitment to a progressive dividend. I think its exposure to investment management at a time when many people have saved more than usual could be positive.
With its 7%+ yield, I would consider buying M&G shares for my portfolio today.