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As a veteran investor with more than 35 years of stock buying experience, I frequently review the FTSE 100 Y FTSE 250 cheap stock indices. In a recent stock review, I found over 20 Footsie stocks that paid high returns (defined as at least 5% per year to me).
Stocks I own for juicy dividends
Since mid-2022, my wife and I have been building a new stock portfolio. Our main objective with this new asset is to generate high levels of income. We can then use this extra money to help pay our sky-high bills or reinvest in more stock.
So far, we have bought 17 new shares, with at least three more to come. In the meantime, here are three cheap ones we bought for their excellent dividend-producing properties:
| Company | legal and general | red river | vodafone |
| Business | Financial services | Mining | telecommunications |
| share price | 260.8p | 6,291p | 93.42p |
| maximum of 52 weeks | 295.7p | 6406p | 141.6p |
| minimum of 52 weeks | 201.4p | 4,424.5p | 83.24p |
| 12 month change | -10.0% | +13.0% | -25.9% |
| Market value | £15.6 billion | £105.7 billion | £25.4 billion |
| Price-earnings ratio | 7.7 | 7.2 | 14.6 |
| earnings performance | 13.0% | 13.9% | 6.8% |
| dividend yield | 7.2% | 8.3% | 8.4% |
| dividend hedge | 1.8 | 1.7 | 0.8 |
These three come from very different corporate worlds. legal and general Group is one of the UK’s leading providers of life, savings and investment insurance. Anglo-Australian miner red river It is one of the world’s largest producers of aluminium, copper, iron ore and zinc. And the telecommunications giant vodafone is a leading global provider of mobile and broadband services.
When building a portfolio, this stock diversification—spreading your money across vastly different companies and sectors—is a very good thing. Helps prevent the risk of concentration and avoids having too many eggs in similar baskets.
These three stocks offer cash returns that outperform the market
The next thing I would say is that all three have low or modest price-earnings ratios and high earnings yields. To me, this is the definition of a ‘cheap’ stock, one with an earnings yield that exceeds the market average. Legal & General and Rio Tinto have earnings returns of 13% and almost 14% respectively, roughly double the FTSE 100 below 7%.
But what led us to buy these stocks for our family portfolio is their market-beating dividend yield. The highest (8.4% annual) comes from Vodafone, whose share price has plummeted by more than a quarter in the last 12 months. However, this cash return is covered only 0.8 times by winnings, making it the least robust of the payouts of this trio.
By contrast, at Rio Tinto, the dividend yield of 8.3% (more than double the cash return of the FTSE 100) is covered 1.7 times by earnings. Although history has taught me that mining dividends can be highly volatile, I am currently confident of Rio paying out in 2023. On the other hand, Rio last canceled its dividend in 2016. Whoops.
Lastly, L&G’s cash yield of 7.2% per annum has the highest dividend coverage, at 1.8 times. I consider this payout to be rock solid barring another market crash, that is. In fact, I expect to own this stock for many years because of its ability to generate income.
In short, we bought these three stocks cheap after their prices fell sharply. And now we intend to keep them as passive income for many years, or maybe until their dividends are reduced!
