If you’re looking for a retirement plan that blends current income with meaningful growth potential, this strategy may be worth your attention. I’m aiming to generate £12,959 a year in retirement from a £20,000 starting stake in an ultra-high-yield FTSE 100 income share.
One stock that stands out to me is M&G (LSE: MNG). In my view, it ranks among the FTSE 100’s most compelling income-focused picks. Its dividend yield sits among the top in the index, and the current share price appears markedly undervalued. Importantly, solid earnings growth forecasts suggest dividends and capital gains could both move higher in the future.
That combination—strong income today plus potential growth in value tomorrow—renders M&G a rare dual‑engine investment, in my assessment. The key question is whether the market has fully priced in this opportunity.
Robust earnings growth as a driver
A company’s share price and its ability to pay dividends hinge on earnings growth. For M&G, a potential risk is a prolonged downturn in equity or bond markets, which could shrink assets under management, reduce fee income, and eventually depress earnings.
Nevertheless, consensus analyst forecasts point to earnings rising around 34% per year on average through the end of 2027. This trajectory is supported by recent results showing momentum across both revenues and profits.
In the first half of the year, M&G reported adjusted operating profit before tax of £378 million. Net flows improved to £2.1 billion, from a £1.1 billion outflow in the first half of 2024. Assets under management also expanded to £354.6 billion from £346.1 billion, and the Asset Management division helped push down the cost‑to‑income ratio from 77% to 75%.
These positive signals were echoed in the company’s 2024 results released in March. Adjusted operating pre‑tax profit rose 5% year over year to £837 million, with Asset Management contributing a 19% increase.
The business has also adopted a progressive dividend policy, signaling that payouts should grow in line with earnings per share, and that the dividend would not be reduced if earnings dip.
Understanding market pricing
Share prices don’t always reflect a company’s intrinsic value. Prices are what the market is willing to pay at any moment, while value is rooted in the underlying fundamentals. The divergence between price and value often presents the opportunity for long‑term capital gains as prices tend to move toward fair value over time.
The discounted cash flow approach helps estimate a fair price by forecasting future cash flows from the business, incorporating factors like earnings growth.
For M&G, a DCF analysis suggests the stock is substantially undervalued at the current price of around £2.77, with a calculated fair value near £6.30.
Projected income from this holding
M&G’s 2024 dividend stood at 20.1p per share, yielding about 7.3%—well above the FTSE 100 average of roughly 3.1%. Analysts expect the dividend yield to rise modestly, aiming for around 7.8% next year and about 8.1% in 2027, as earnings grow.
Of course, yields and prices will fluctuate over time, and dividends may vary. If we assume the present 7.3% yield and reinvest dividends, a £20,000 investment could generate about £21,410 in dividend income over ten years.
Thirty years out, assuming continued growth and reinvestment, the portfolio could reach around £157,523 in value, with annual dividend income near £12,959 once fully mature.
With an undervalued price, strong earnings growth prospects, and an attractive income profile, I plan to accumulate more shares in the near term to capitalize on the potential upside.
