I’d buy 5,000 M&G shares to target £1,000 a year in passive income

Passive income is the term used to describe earning money without being actively involved. There are generally three types — dividends from investing, rental income from an asset, and royalties.

For me, investing in the stock market is the most accessible. I don’t have the deposit required to purchase a property. Neither do I have the talent required to, for example, write a piece of music or develop software that could generate a recurring revenue stream.

Although there are never any guarantees, the easiest way for me to generate additional income is via stocks and shares. And, if I was lucky enough to have £10,500 available, I would buy approximately 5,500 shares in M&G (LSE:MNG), which could earn me an impressive £1,000 every year in passive income (dividends).

What does the company do?

M&G is a savings and investment company with two distinct business units.

The first is its asset management arm which earns fees from wholesale and institutional clients for managing investments on their behalf. The second is the provision of retail products (savings and insurance) to the wider public.

Financial performance

Operating profit for the first six months of 2022 was £182m. Although this was down 44% compared to the same period in 2021, the business still generated £433m of cash (up 40%) from its operating activities.

The company’s profitability was affected by rising interest rates, adversely impacting its annuity margin, and a paper loss of £48m on the portion of debt that is denominated in US dollars.

At 30 June 2022, the company disclosed that it had £349bn of assets under management. Over 75% of these were in the UK, which suggests there is potential for future growth via overseas expansion. Importantly, there was £1.2bn of client inflows in the first half of 2022.

The company also comfortably meets the solvency requirements for those operating in insurance markets.

It’s all about the yield

When looking for opportunities to generate passive income, I always consider the dividend yield of a particular stock. This is calculated by dividing the expected annual dividend by the current share price.

M&G’s shares are currently one of the highest yielding in the FTSE 100. This is partly because the share price has taken a bit of a tumble recently, but also due to the generous dividend that the company pays its shareholders.

Over the past year, the share price has fallen by around 7%, probably reflecting the reduction in profits.

But, the key to successful investing is to take a long-term view. Personally, I believe the fall in the price of the stock gives buyers an opportunity to acquire part of a quality dividend-paying company at a good price.

As can be seen from the table below, M&G has steadily increased its dividend over the past three years. My forecast for 2022 assumes a small uplift in the final dividend.

If I’m correct, this means the shares are currently yielding 9.6%!

What am I going to do?

Unfortunately, I don’t have any spare cash to invest in M&G right now. But, the company is definitely on my radar as I seek to increase my passive income in 2023.