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As decent as the performance of the FTSE 100 Index So far in 2024, there are still many stocks within the index that are trading at low valuations. I would consider buying some of them if I had the funds to do so, especially if generating passive income was my primary goal.
Long-term purchase
Rio Tinto (LSE:RIO) is one example. The miner's shares sell for just nine times forecast earnings. That's well below the UK blue-chip stock market average, though it's broadly similar to its sector peers.
This “discount” is not surprising. Demand for metals has fallen, particularly from big buyers like China. This means lower profits for those who mine the shiny material and helps explain a 17% drop in the price since the beginning of January.
On a more positive note, falling sentiment has pushed the dividend yield up to 6.4%. It looks like it will also be comfortably covered by expected earnings (at least, for now).
I also have an eye on the longer-term outlook. With copper and lithium likely to become scarce as the world transitions to green energy, Rio Tinto could find itself in a rough patch before long. That could mean big increases in the amount of money returned to shareholders.
stocks with high dividends
Spending all my money on one company is asking for trouble. For this reason, I would be tempted to also buy shares in a completely different company, such as Legal and general (LSE:LGEN) currently offers a monstrous yield of 9.5%.
Valuation is equally attractive. The stock is trading at 12 times earnings, a figure that will fall to nine times in fiscal 2025.
However, analysts' projections should be taken with a grain of salt. Any unexpected economic upheaval will force City residents to turn to their calculators.
I am also aware that this year's earnings will not cover that exorbitant dividend. That would be worrying if it continued into 2025.
On the other hand, Legal & General has been remarkably consistent in increasing the amount of cash it sends since the Great Financial Crisis, so a major cut is not expected.
Add to this the fact that an ageing population is increasingly aware of the need to plan for the future, and I believe the attractions far outweigh the risks.
Defensive Demon
One final dividend stock I would consider buying is the drug maker. GSK (LSE: GSK).
It may seem like an odd choice. GSK's yield is “barely” 3.8%, significantly lower than the other two stocks. So what do we (really) like?
Well, this goes back to what I mentioned earlier. Spreading my money across different types of companies will ensure that I am not left in the lurch if any of them are forced to “review their policy” on dividends – i.e. stop paying them out!
Since we all get sick from time to time, pharmaceutical companies are some of the most defensive stocks on the market. This also makes a price-to-earnings (P/E) ratio of 10 a potential bargain.
Bringing new drugs to market is neither easy nor cheap, and failures can undermine confidence for a time. But the opposite is also true. Shingles vaccine ShingrixFor example, it has been a major recent revenue stream for GSK.
In addition to this, the aforementioned performance is still higher than what you would get if you had a fund that tracks the FTSE 100 index.
