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Buying dividend shares is a simple way to try and earn passive income.
One FTSE 100 dividend share I think investors should consider is asset manager M&G (LSE: MNG). With the share price currently sitting well below £3, an investor with a spare £1,000 could scoop up 393 M&G shares.
Last year, the dividend per share was 20.1p. So, 393 shares ought to earn just under £79 a year of income.
In fact, I think the earnings could be higher. Although dividends are never guaranteed, M&G aims to maintain or increase its dividend per share each year.
It has delivered on that aspiration over the past few years. This year’s forthcoming interim dividend is 6.7p per share – not much higher than last year’s 6.6p, admittedly, but higher nonetheless.
What I look for when buying income shares
Looking at M&G’s accounts, the profit and loss line may not look promising. Last year, for example, it made a loss after tax (on an IFRS basis) of £347m. The first half of this year saw it swing to a post-tax profit (again on an IFRS basis) of £247m – much better, but demonstrating the volatility of the firm’s bottom line.
But, as is often the case with financial services firms, profit and loss statements can be somewhat unhelpful when it comes to assessing how likely M&G is to be able to maintain its dividend.
Financial services firms have client inflows and outflows, along with asset valuation changes, that can affect the profitability number from one year to the next.
Instead, I pay more attention to cash generation. After all, generating enough spare cash is what enables a company like M&G to pay its dividend.
In the first half, M&G’s total capital generation came in at £354m. That covers the £321m cost of the dividend during the period, although with a limited margin of safety, in my view.
A lot to offer
That fairly slim coverage could become problematic if M&G’s cash generation falls.
In recent years, clients had been pulling more out of its open funds than they put in, threatening profits. I see that as an ongoing risk, although the first half was positive in this regard. Inflows were £2.1bn higher than outflows.
Looking at the bigger picture, I continue to see a lot to like about this dividend share. Asset management is a huge industry and benefits from strong, resilient customer demand over the long run.
M&G has a large customer base, spread across the globe, not just in the UK. It has a strong brand, deep experience in the asset management field, and a reputation that can help it attract and retain clients.
The share price – even after growing 60% in five years – still strikes me as attractive, as does the 7.9% dividend yield.
