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

Passive income is a term used to describe earning money without actively participating. There are generally three types – dividends from investments, rental income from assets, and royalties.

For me, investing in the stock market is the most accessible. I don’t have the deposit required to buy the property. I also don’t have the talent needed to, for example, write pieces of music or develop software that can generate a steady stream of income.

Although there are no guarantees, the easiest way to generate additional income is through stocks and shares. And, if I’m lucky enough to have £10,500 available, I’ll buy about 5,500 shares in M&G (LSE:MNG), which can earn £1,000 a 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 an asset management arm that earns fees from wholesale and institutional clients to manage investments on their behalf. The second is the provision of retail products (savings and insurance) to the general public.

Financial performance

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

The company’s profits were hit by rising interest rates, impacting annuity margins, and a £48m paper loss on the portion of debt denominated in US dollars.

As of June 30, 2022, the company announced that it had £349bn of assets under management. More than 75% of these are in the UK, which suggests there is potential for future growth through overseas expansion. Importantly, there is a client inflow of £1.2bn in the first half of 2022.

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

It’s all about results

When looking for opportunities to generate passive income, I always consider the dividend yield of certain stocks. It is calculated by dividing the expected annual dividend by the current share price.

M&G shares are currently one of the highest yielding FTSE 100. This is partly because the share price has fallen slightly, but also because of the dividends the company pays its shareholders.

Over the past year, the stock price has fallen about 7%, possibly reflecting a decline in profits.

However, the key to successful investing is taking a long-term view. Personally, I believe that falling stock prices provide buyers with an opportunity to acquire shares of dividend-paying companies at a good price.

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

Financial Year (December 31)	Dividend (pence per share)
2019	15.77
2020	18.23
2021	18.30
2022 (estimated)	18.60

If I’m right, this means the stock is currently yielding 9.6%!

What am I going to do?

Unfortunately, I don’t have any spare cash to invest in M&G at the moment. However, the company is definitely on my radar as I look to increase my passive income in 2023.