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I have been investing in high-yielding FTSE 100 shares for around 35 years now. And since I turned 50 a while back, I have focused even more on them. This is because the income they provide through dividends can be used to make a much more comfortable retirement. It might also allow for a much earlier retirement than the norm.
Top-flight insurer and asset manager M&G (LSE: MNG) remains one of my strongest performers in this context. Last year, it paid a total dividend of 20.1p, which gives a yield of 7.9% — one of the highest in any FTSE index.
By comparison, the present average FTSE 100 yield is 3.3% and the FTSE 250’s is 3.5%.
So what might another £20,000 in the stock make me in dividend yield over time?
The yield’s projected to go higher
As high as it is now, analysts forecast its dividend yield will go even higher. The projections are for dividends of 20.6p this year, 21.3p next year, and 22p in 2027. These would generate respective yields of 8.1%, 8.3%, and 8.6%.
Using just the current 7.9% yield, £20,000 invested by me now would make £1,580 in first-year dividends. This would rise to £15,800 after 10 years and to £47,400 after 30 years.
This is clearly a lot more than I would make from a standard bank savings account. But it could be exponentially higher if I used a standard investment practice of dividend compounding.
Dividend compounding’s multiplier effect
Dividend compounding simply involves reinvesting the dividends paid by a stock straight back into it. But its effect on dividend income is extraordinary.
Specifically, my same £20,000 at the same 7.9% yield would make me £23,954 in dividends after 10 years, not £15,800. And after 30 years on the same basis, this would jump to £192,293 rather than £47,400.
Including my initial £20,000 investment, the total value of my M&G holding by then would be £212,293. And this would generate me £16,771 a year in income just from the dividends!
What about share price gains too?
In my experience as a former senior investment bank trader and private investor, asset prices tend to converge to their ‘fair value’ over time. This is not the same thing as ‘price’, which is just whatever the market will pay for a stock at any given time.
The best way I have found to ascertain a share’s fair value is the discounted cash flow model. This identifies the price at which any stock should trade, based on cash flow forecasts for the underlying business.
In M&G’s case, it shows the shares are 30% undervalued at their current £2.55 price. Therefore, their fair value is £3.64.
So my £20,000 would have bought me 7,843 M&G shares at the original £2.55 price. Those same shares following the bridging of the price-to-valuation gap to £3.64 would be worth £28,549. Therefore, I would have made another £8,549 profit on the share price alone.
Will I buy more?
A risk to M&G’s earnings – which are what ultimately drives any firm’s share price and dividends – is intense competition in the sector.
However, analysts forecast that its earnings will grow by a whopping 35% a year to end-2027. Consequently, I will buy more of the stock very shortly.
