Is the Magellan share price a buy for its big dividend yield?

Is the investment manager’s dividend yield simply too good to ignore?

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The Magellan Financial Group Ltd (ASX: MFG) share price has been one of the worst performers in the S&P/ASX 200 Index (ASX: XJO). Over the past year, it has fallen a massive 71%. Ouch.

But, with big falls in the share price, the Magellan dividend yield has been boosted. However, it must also be said that the dividend is likely to fall in dollar terms because of the drop in Magellan’s funds under management (FUM) and the subsequent effect on profit.

But before we get to that, I must admit that I recently sold my own Magellan shares. The fall of the Magellan share price has been very disappointing, but it wasn’t the reason I sold my holding.

The key attraction about Magellan to me was its Magellan Capital Partners segment making investments into operating businesses like Guzman y Gomez (GYG). The long-term growth potential and diversification of that segment was appealing. However, Magellan recently decided it’s going to focus on its funds management business, so it sold its GYG stake. Whether Magellan shares were up or down, I would have decided to sell because the key reason why I invested was being dropped.

Magellan dividend expectations

The fund manager has committed to a high dividend payout ratio. So, at this lower Magellan share price, it represents a large dividend yield.

CMC Markets has an estimate of 105.9 cents per share for the annual dividend per share in FY23. Excluding the effect of franking credits, that would be a forward yield of 7.1%. Including franking credits, the yield would be more than 9%.

Just to reiterate, that dividend estimate would still represent a huge dividend cut compared to FY21.

Should investors buy for the income?

The difficulty is knowing what’s going to happen next.

At the moment, there is an ongoing heavy outflow of funds from Magellan’s business. The amount of FUM Magellan has is a key revenue and profit generator for the business. The loss of FUM is a major factor in why investors (including brokers) now think the business is worth less than before.

In FY24, profit is expected to decline again, leading the annual dividend to drop to just 87.1 cents according to the estimate on CMC Markets.

Will the dividend keep dropping after that? Who knows. Perhaps the leadership and investment team can turn things around. The Magellan share price can act independently of FUM movements.

However, I’m looking for businesses that are capable of growing their underlying profit, value, and dividend for shareholders.

The key thing for Magellan is to start generating some good performance in its key investment funds over longer time periods again. With relatively high fees, what will attract/retain funds if the investment fund is underperforming against its benchmark consistently?

However, I will note that the global equity strategy has delivered short-term outperformance against its benchmark, as at 30 June 2022, over the prior month and three months.

But, I think there are other ASX dividend shares that have the capability of producing more attractive returns and growing the dividend.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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