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I raided the FTSE 100 for 2 cheap income stocks

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During six months of inactivity, my wife and I avoided buying shares. However, over the past six weeks, we have been buying cheap shares hand over fist. In this recent buying spree, we bought six FTSE 100 and three FTSE 250 shares, plus one US S&P 500 stock.

We took the plunge in late June after share prices declined in their usual summer lull. By buying these 10 new stocks, we created a new mini-portfolio which is already showing positive paper gains. Of course, it’s very early days — and we bought these low-priced shares for the long haul. Also, each of the FTSE 100 stocks we bought offered very attractive dividend yields. I like the idea of being paid well to own shares while we patiently wait for stock prices to rise over the years.

Two cheap FTSE 100 income stocks

Across all 10 new shares we’ve bought, the average dividend yield comes to around 7.2% a year. To me, this is a decent reward for the risk of holding shares whose value can go down as well as up. Among these 10 new stocks, these two Footsie shares have the highest cash yields, and both beat the wider London market by miles:

Company Share price 12-month change Market value Earnings yield Dividend yield Dividend cover
Persimmon 1,850p -36.3% £5.9bn 13.3% 12.7% 1.0
Rio Tinto 4,840.5p -14.3% £80bn 18.4% 10.9% 1.7

Safe as houses?

Persimmon (LSE: PSN) is one of the UK’s leading housebuilders, with a market value approaching £6bn. In the 12-year housing boom that followed the global financial crisis of 2007/09, Persimmon shares skyrocketed. They closed at 3,282p on 21 February 2020, just before Covid-19 crashed global stock markets.

However, this FTSE 100 stock has fallen sharply since April 2021 and has lost more than a third of its value over one year. This comes as soaring inflation — driven by soaring energy bills — hits disposable incomes. Also, the UK housing market is expected to cool as interest rates rise, driving up mortgage rates. And the risk of an economic slowdown or outright recession keeps climbing.

In short, Persimmon and its property peers face strong headwinds over the next 12 to 18 months. Even so, a whopping dividend yield of 12.7% a year seems a decent return for owning what is most likely to be a volatile share in 2022/23.

Rio Tinto: major miner

The second high-yielding Footsie stock we recently bought is mega-miner Rio Tinto (LSE: RIO). This Anglo-Australian group is a FTSE 100 Goliath with a market value of over £80bn. However, Rio Tinto’s share price has taken a beating in 2022, following declines in the prices of base metals such as aluminium, copper, and iron ore.

On 3 March 2022, Rio Tinto stock hit a 52-week high of 6,343p. It has since come crashing back to earth and is currently down almost a quarter (-23.7%) from this previous peak. Clearly, with Chinese demand for metals slumping and the global economy slowing, this giant miner faces tough times in 2022/23. But at nearly 11% a year, its dividend yield was just too tempting for me to resist. And even it were to be halved, it would still be a market-beating 5.5% a year. So if Rio shares keep falling, I may be forced to buy more!

The post I raided the FTSE 100 for 2 cheap income stocks appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Persimmon and Rio Tinto shares. 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.