Stock Analysis

Does M&G Credit Income Investment Trust plc (LON:MGCI) Have A Place In Your Dividend Portfolio?

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LSE:MGCI
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Today we'll take a closer look at M&G Credit Income Investment Trust plc (LON:MGCI) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

Some readers mightn't know much about M&G Credit Income Investment Trust's 3.1% dividend, as it has only been paying distributions for a year or so. There are a few simple ways to reduce the risks of buying M&G Credit Income Investment Trust for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on M&G Credit Income Investment Trust!

historic-dividend
LSE:MGCI Historic Dividend February 14th 2021

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 71% of M&G Credit Income Investment Trust's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and while it does limit the amount of earnings that can be reinvested in the business, there is also some room to lift the payout ratio over time.

Consider getting our latest analysis on M&G Credit Income Investment Trust's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. This company has been paying a dividend for less than 2 years, which we think is too soon to consider it a reliable dividend stock. Dividends per share have grown at approximately 36% per year over this time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Earnings have grown at around 4.3% a year for the past five years, which is better than seeing them shrink! Growth of 4.3% is relatively anaemic growth, which we wonder about. If the company is struggling to grow, perhaps that's why it elects to pay out more than half of its earnings to shareholders.

We'd also point out that M&G Credit Income Investment Trust issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, we think M&G Credit Income Investment Trust has an acceptable payout ratio. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. M&G Credit Income Investment Trust might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come accross 4 warning signs for M&G Credit Income Investment Trust you should be aware of, and 1 of them makes us a bit uncomfortable.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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About LSE:MGCI

M&G Credit Income Investment Trust

M&G Credit Income Investment Trust plc invests in a portfolio of public and private debt and debt-like instruments.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance0
Financial Health6
Dividends1

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet and slightly overvalued.