2,475 shares in this overlooked FTSE 100 dividend gem could make £9,532 a year in passive income over time!

FTSE 100 investment management company IM&G (LSE: MNG) is rarely among the best-traded stocks in a leading index. Instead, it quietly goes about its business and religiously pays its big dividends.

And that’s exactly what I’m looking for in a share I buy for passive income. This is money made with little daily effort, especially in my opinion with dividends paid stocks.

Core business

I hold M&G shares in my portfolio. By 2023 its year-on-year adjusted operating profit jumped by 28% to £797m. In the same period, its operating cash flow jumped 21% to £996m.

And its key Shareholder Solvency II ratio rose from 199% to 203%. A rating of 100% is the industry standard.

Its H1 results showed a 4% drop in adjusted operating profit for the same period in 2022 to £375m. Its working capital generation saw less than the same rate of decline to £486m. However, its Shareholder Solvency II coverage ratio improved to 210%.

The risk here is the high level of competition in the sector which may reduce the profit margins of the company. Another is a resurgence in the cost of living that could cause investors to close their accounts.

However, the consensus analyst expectation is that M&G’s earnings will grow at a healthy 28.9% annually through 2026. And it’s earnings growth that increases the price of a company’s profits and shares over time, in my experience.

What does the share price look like?

The stock already looks deeply undervalued to me based on the fundamental measures I rely on the most.

On a price-to-book ratio, it trades at just 1.3 compared to a peer average of 3.6. Average sales price is currently 0.8 compared to 4.3 average for competitors.

Most important to me at all times in trying to find undervalued stocks is the discounted cash flow (DCF) analysis.

A DCF using other analysts’ calculations and mine shows that M&G shares are 55% undervalued at their current price of £2.02. So the fair value for them would be £4.49.

They may go lower or higher than that, given the vagaries of the market. However, it does confirm to me how undervalued the stock looks at this point in time.

This reduces the chance that my dividend gains will be offset by a loss in share price if I ever sell the stock.

How much income can I make?

I already have a large holding in M&G but am thinking of adding another £5,000 to it. At today’s price, this would buy me 2,475 additional shares.

As the stock now yields 9.9% (compared to the FTE 100 average of 3.6%) this will leave me with £8,402 in dividends after 10 years.

This is given when I buy more stock with dividends paid to me and dividends can be terminated. It is a common investment practice known as ‘dividend compounding’.

At the same rate of yield of 9.9%, I would have made £91,279 in dividends after 30 years.

Adding to the initial investment of £5,000, my M&G shares will be worth £96,279 at that time. And they will be generating £9,532 a year in passive income for me, or £794 every month.

Given the stock’s high earnings potential, deep dilution, and strong income potential, I will be buying more shares soon.