Earning a passive income has never been earlier thanks to dividend shares. Just by being an owner of a cash-generative business, I can continually earn a slice of the profits from the businesses I own, all without having to do a lick of work.
But of course, dividend shares aren’t free. And buying them to earn a substantial sum like £10,000 a year might need a hefty sum. Yet while people commonly think this sort of income is out of reach, it’s not as impossible as most might think.
Let’s crunch the numbers…
How big does my portfolio need to be?
Looking at the FTSE 100 today, the UK’s flagship index is paying a dividend yield of around 3.05%. That means for every £1 I invest in a low-cost tracker, I can expect to earn 3.05p in passive income. And at this rate, earning £10,000 a year will require a £327,869 portfolio.
Needless to say, that isn’t exactly pocket change.
But here’s the good news. By investing in individual quality, high-yielding dividend shares with yields closer to 6%, the required portfolio size collapses in half to roughly £166,666.
That’s still a significant figure, but it’s one that consistent monthly investing and the magic of compounding can definitely build towards over time.
So the question now is, which 6%-yielding dividend share should investors be considering right now?
6% yields from the FTSE 100
M&G‘s (LSE:MNG) one option that’s caught my attention. As a quick reminder, it’s one of the UK’s leading savings and investment businesses, managing money for millions of customers worldwide. And right now, the stock’s offering a chunky 6.2% payout.
However, it’s essential to understand that a high yield isn’t a guarantee. In fact, it can often be a warning sign that dividends could be at risk of being cut.
With that in mind, let’s take a look at the latest quarterly results. Net inflows from open business reached £0.6bn, compared to a £0.1bn outflow in the same period last year. That’s a crucial piece of information since the more client funds under M&G’s roof, the more fee-earning opportunities it has.
What’s more, this rising net inflow trend could be set to continue. After all, an ageing UK population’s generating growing demand for retirement savings products, and M&G sits squarely in that sweet spot.
Having said that, there are some critical risks to consider carefully. Beyond having to tackle the threat of fierce competition from rival firms, M&G’s business model is ultimately dependent on external market conditions. If the stock or bond market decides to throw a tantrum, the performance of its financial products can suffer, prompting clients to pull their money out.
What’s the verdict?
M&G’s yield is a bit strange. Even though the business is showing improved performance with net inflows ramping back up, investors are seemingly reluctant to jump on board largely because of macroeconomic concerns.
That’s perfectly understandable given the volatile trade and geopolitical global landscape today. But buying when others are fearful is a proven recipe for success. That’s why I think, on balance, M&G shares are worth a closer look.
And it’s not the only dividend share I’ve got my eye on right now…
What income stock do we like better than M&g Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
