Dividends can be a solid source of income, and there are many UK shares that have large, sustainable yields. Here are two FTSE 100 dividend stocks that I believe are very undervalued and would buy in 2022.
A diversified miner
Due to the rising price of commodities, Anglo American (LSE: AAL) had an excellent 2021. Indeed, in the first half of the year, revenues rose 114% year-on-year to $2.8bn. Underlying EBITDA was also able to increase 262% to reach over $12.1bn. This was only possible due to the extremely high price of the commodities that Anglo sells. For example, in the first half, its average iron ore price rose from $90 to $210 per tonne; the price of copper rose from $2.50 to $4.60 per pound; and rhodium rose from $9,254 to $24,662 per ounce.
These large profits have resulted in very large dividend payments, a reason why Anglo is one of my favourite dividend stocks. Indeed, last year, the group paid an interim dividend of $1.71 per share and a special dividend of $0.80 per share. For the next 12 months, it has a prospective yield of around 6%, far higher than other FTSE 100 stocks. The policy of paying out 40% of profits also seems very sustainable.
Nonetheless, while I would buy due to this dividend, there is the risk that profits will decrease. This is because the high price of commodities may not be sustainable. For instance, the price or iron ore has already fallen to $116 per tonne due to plummeting Chinese demand. This is Anglo’s most profitable segment, so it may lead to declining profits, and a smaller dividend next year. But it has a very diversified portfolio, and this helps it stand out from other mining stocks. This is what tempts me to buy for my portfolio.
An insurance dividend stock
Aviva (LSE: AV) is the other dividend stock I think could perform well in 2022. Indeed, after selling several non-core divisions over the past year in an attempt to focus its business on both the UK and Canada, the insurance company has a ton of cash. This means that at least £4bn is expected to be returned to shareholders. This is likely to include a special dividend, which will be announced at the full-year results in March. Even without this special dividend, which has not actually been confirmed, Aviva shares still yield nearly 6%.
The dividend also looks very sustainable. Indeed, at the company’s half-year results, it reported that debt had been reduced by £1.9bn. Following this debt reduction, more excess cash can be returned to shareholders. This cements Aviva as one of my current favourite dividend stocks, being both high-yielding and sustainable.
There is, unfortunately, the risk that the UK’s economic recovery takes a downturn due to Omicron. Indeed, Aviva is fairly reliant on a strong economy. But due to the many strengths of the company, I remain confident and may add more of the shares to my portfolio.
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Stuart Blair owns shares in Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.