As an old-school value investor, I like to buy cheap shares and then hold them for years and sometimes decades. And as I get older (I’m 55 this week), I tend to buy more and more income stocks.
What are income stocks?
Income stocks are shares that I buy for their ongoing ability to churn out cash dividends to investors. After all, long experience has taught me that these dividends account for a sizeable slice of my long-term returns.
However, most London-listed shares don’t pay dividends to their shareholders. In many cases, these companies are loss-making, or reinvest their earnings to boost future growth. Also, future dividends are not guaranteed, so they can be cut or cancelled without notice.
Therefore, my happy hunting ground for income-generating shares is the blue-chip FTSE 100 index, where all but a handful of stocks pay regular dividends. Here are five Footsie shares that all offer marketing-beating cash yields to patient investors like me.
Five FTSE 100 dividend shares
Right now, the FTSE 100 offers a dividend yield of around 4% a year. But these five stocks offer dividend yields well above that of the wider index. I’ll start with their share prices, then move on to the stocks’ fundamentals.
| Company | Share price | One-year change | Five-year change | Market value |
| Aviva | 427.5p | -22.3% | -37.1% | £12.0bn |
| Legal & General | 241.6p | -8.8% | -6.4% | £14.5bn |
| M&G | 207.2p | -8.8% | -7.2% | £4.9bn |
| Rio Tinto | 5,559p | +4.9% | +50.3% | £92.5bn |
| Vodafone | 96.25p | -21.0% | -52.3% | £25.8bn |
The only one of these five income stocks to gain in value over the past year is mega-miner Rio Tinto, whose shares are up almost 5%. The remaining four shares have all dropped over the past 12 months, with telecoms giant Vodafone Group and insurer Aviva worst hit.
Of course, falling share prices translate into higher dividend yields (all else being equal, that is). Here’s how these five firms’ cash yields stack up:
| Company | P/E ratio | Earnings yield | Dividend yield | Dividend cover |
| Aviva* | – | – | 7.3% | – |
| Legal & General | 6.6 | 15.1% | 8.0% | 1.9 |
| M&G* | – | – | 9.5% | – |
| Rio Tinto | 8.8 | 11.4% | 7.3% | 1.6 |
| Vodafone | 14.9 | 6.7% | 8.1% | 0.8 |
Note that insurers/asset managers Aviva and M&G‘s trailing earnings are negative. Thus, they don’t currently have valid price-to-earnings ratios, earnings yields and dividend cover. But these figures should be restored this year, as both groups return to profit in 2023.
Shares with both high earnings yields and market-beating dividend yields really appeal to me, especially if their corresponding dividend cover is high. For example, thanks to its impressive 15.1% earnings yield, L&G stock offers a whopping dividend yield of 8% a year, covered 1.9 times by earnings.
Similarly, Rio Tinto shares offer a dividend yield of over 7% a year, covered 1.6 times by earnings. Then again, with the global economy expected to weaken in 2023, earnings at many of these companies will likely take a knock this year. But as a long-term investor, I can ride out this market volatility.
Would I buy all four of these income stocks today? My answer is no, but solely because I already own four of these dividend shares. The only one I don’t already own is M&G, which is already on my buy list for when the next tax year starts on 6 April!
The post 5 FTSE 100 income stocks paying bumper dividends appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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More reading
- 8.8% dividend yield! Is the HSBC share price the FTSE 100âs greatest bargain?
- 2 FTSE 100 stocks I’d buy before Mr Market changes his mind!
- Up 5% in March: why National Grid shares are worth considering now
- Forget Premium Bonds! I’d aim for a million by investing £50k in UK shares
- After doubling, what’s next for the Premier African Minerals (PREM) share price?
Cliff DâArcy has an economic interest in Aviva, Legal & General Group, Rio Tinto, and Vodafone Group shares. The Motley Fool UK has recommended Vodafone Group Public. 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.
