Passive income is money made with minimal effort – most appositely in my view in the form of share dividends.
These regular annual earnings can dramatically improve the quality of daily life for investors. They can also pave the way for a much earlier retirement — and a far more comfortable one — than might otherwise be the case.
A core passive income stock for me has been – and remains – FTSE 100 investment manager M&G (LSE: MNG).
How much could have been made in five years?
£10,000 would have bought investors 7,692 shares at 27 May 2021’s opening price of £1.30.
From then to now, the firm has paid 95.93p in dividends. This gives a total dividend amount paid on the shares of £7,379.
That said, the stock price has also risen over that time from £1.30 to today’s opening price of £2.17. This gives an additional gain on the share price of £6,692.
Therefore, the total profit made over five years on £10,000 of M&G shares is £14,071 — a return of over 140%!
Can this price performance be sustained?
A risk to the firm is a further surge in the cost of living that could cause customers to close their accounts.
However, consensus analysts’ forecasts are that M&G’s earnings will increase by a spectacular 42.45% every year to end-2027! It is growth here that ultimately powers any firm’s stock price – and dividends – higher over time.
And the share price is extremely undervalued already, in my opinion, so it could rise a long way.
Specifically, M&G trades on the key price-to-sales ratio at just 1 – bottom of its peer group, which averages 4.25. The firms are Legal & General at 1.2, Man Group at 1.9, Hargreaves Lansdown at 6.9, and Intermediate Capital Group at 7.
It also looks very undervalued at its 1.6 price-to-book ratio compared to its competitors’ average of 3.6.
I ran a discounted cash flow (DCF) analysis to ascertain exactly what M&G’s share price should be, based on future cash flows.
This shows the stock is 52% undervalued at its current price of £2.17.
Therefore, its fair value is £4.52, although market vagaries could push it lower or higher.
What about the yield outlook?
In 2024, M&G paid a total dividend of 20.1p, which yields 9.3% on the present share price.
Analysts project this will rise to 20.6p this year, 21.2p next year, and 22p in 2027. These would generate respective yields on the current share price of 9.5%, 9.8%, and 10.1%.
Using the current 9.3% yield, £10,000 invested today would generate £4,650 over the next five years.
That said, if the dividends were reinvested back into the stock – known as ‘dividend compounding’ – £5,892 would be made.
Given the strong prospect in my view of major gains from the share price and dividends I will buy more M&G shares as soon as possible.
