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I like to shop cheap FTSE 100 high yield dividend stocks, and these two caught my eye. Both offer a powerful stream of income at a decent price. What’s going on?
The first is a mining giant Rio Tinto (LSE: RIO). Its shares have a price-to-earnings ratio of exactly nine, comfortably below the FTSE 100 average of 15.4 times. The next yield is a whopping 6.7%, more than double the blue-chip average of 3.5%. The fact that it is covered at 1.7 times earnings suggests that it is sustainable as well.
This combination of high P/E and high yield usually indicates a falling stock price, and that’s the case here. Rio Tinto’s share price is down 5.76% over 12 months, lagging behind the overall FTSE 100, which is up 10.33%.
Like all mining giants, Rio Tinto has been hit by falling Chinese demand for metals and minerals, as the world’s second-largest economy shrinks.
I would like to buy today
Despite that, Rio still posted a first-half profit of $12.1bn as at 31 July, generating $7.1bn of net cash from operations. “Rio Tinto remains profitable and growing”according to CEO Jakob Stausholm. Investors are sharing in its success, as the group paid an interim ordinary dividend of $2.9bn, reaching its target of paying 50% of underlying profits.
The dividend looks strong to me but why is it so cheap? Investors are waiting to see if Beijing can revive Chinese growth, but recent stimulus packages have not slowed down. And while investors are trying to find a soft US, the country’s huge deficit and debt are quietly increasing.
However I think Rio Tinto looks to be a solid long term dividend yield and share price growth. I would rather take it before the stock goes up, than after, I will do so as soon as I have the money.
My second high-yielding, low-priced stock is the cigar maker Imperial Brands (LSE: IMB). Personally, I don’t buy tobacco stocks, but I like to check them from time to time, to see what I’m missing.
I wish I could buy Imperial Brands
Today, I’m giving up a sweet 6.5% yield available at a discounted P/E of 8.46 times. And that hurts.
Imperial Brands continues to throw money at loyal investors, targeting £2.8bn in share dividends and share buybacks this year, up from £2.4bn last year.
Tobacco stocks have traditionally been cheap as investors acknowledge that government health and regulatory campaigns will put some pressure on sales, especially in developed countries, leaving manufacturers to squander their shrinking market share.
Now here’s the shocking twist. Imperial Brands’ share price has risen 30.87% over the past 12 months. In three years, it has risen by a staggering 50.73 percent, crushing the index. I knew I was missing out on bags of income here, but I didn’t realize I was giving up a ton of growth as well.
While smoking will decrease, vaping helps close the gap. This source of income cannot be relied upon, as regulators are fighting back. So there are still risks and the recent breakneck share price growth is bound to slow at some point.
That said, if I were to buy a tobacco stock, I would buy Imperial Brands as a shot. Missing this opportunity is enough to make me start smoking! This could be one thing investors should consider.
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