My favourite second income stock has just crashed 15% – should I buy more?

I’ve spent the last year buying high-yielding FTSE 100 shares that I hope will pay me a super-sized second income in retirement.

With the FTSE 100 heading to new all-time highs, most have picked up by 15% or 20% in just six to nine months. With one exception. Wealth manager M&G (LSE: MNG).

I bought my first stake last July, and when the shares showed signs of life, I bought it twice more in November. That month I received my first dividend too. It was my biggest holding, and a personal favourite. For a while.

Struggling income share

M&G shares had performed poorly since the company was hived off from Asia-focused insurer Prudential in 2019. I like buying stocks when they’re out of favour. That gives me a lower entry price and reduces risk. At least in theory.

Also, when a company’s share price falls, its dividend yield rises by default. M&G was paying income of more than 9% a year when I bought it. I’d read its company reports and decided the dividend was sustainable.

I wasn’t deterred by the fact that M&G suffered a £2.5bn pre-tax loss in 2022, reversing the previous year’s £788m profit. Assets under management fell 7.6% to £342bn, down from £370bn.

The board said this was “driven by negative market movements from the volatility experienced in markets throughout a challenging year”. I was assured by news that it was still on track to generate £2.5bn in capital by 2024, while the board hiked the total dividend by 7.1%, from 18.3p to 19.6p.

I decided markets were missing a trick, and this was my opportunity to get in at the bottom, with the intention of holding the shares for years and years, to give those dividends time to compound and grow.

Great yield, poor growth

That’s still the plan, but I’ve been surprised and disappointed to see M&G buck the recent upwards trend, and plunge while the FTSE 100 has been rising.

The M&G share price is down 14.65% in the last month, while the FTSE 100 as a whole jumped 3.26%. Over 12 months, the stock is up just 2.24%. That’s marginally higher than the FTSE 100 1.57% but not exactly great.

So did M&G deliver a dismal set of results? Quite the reverse. On 21 March, it posted a 28% rise in adjusted operating profit before tax to £797m, smashing consensus forecasts of £750m. Net client flows, adjusted profits and operating capital generation all climbed.

Yet the board granted investors only a tiny dividend hike, from 19.6p to 19.7p, a rise of a tenth of a penny. Given the trailing yield of almost 10%, I’m not complaining. Markets apparently take a different view.

M&G looks a bit like a value trap, whose shares might never grow. Trading at 16.07 times earnings, they look fully valued. Yet I’m happy with the yield and overall company direction. I’d invest more, except it’s one of my biggest portfolio holdings, so I’ll just hold and bide my time.

My next dividend of 13.2p per share is due on 9 May. I’m looking forward to reinvesting it to pick up a few more M&G shares (and a bit more second income too).