As decent as the performance of the FTSE 100 has been in 2024 so far, there are still plenty of stocks within the index that trade on lowly valuations. I’d consider snapping up some of these if I had the funds to do so, especially if making passive income were my primary goal.
Long-term buy
Rio Tinto (LSE: RIO) is one example. Shares in the miner change hands for just nine times forecast earnings. That’s way below the average in the UK stock market’s top tier, even though it’s pretty similar to sector peers.
This ‘discount’ isn’t surprising. Demand for metals has fallen, particularly from big buyers like China. This means lower profits for those digging up the shiny stuff and helps to explain a 17% fall in the price since the beginning of January.
On a brighter note, the dip in sentiment has pushed the dividend yield up to 6.4%. It looks set to be comfortably covered by expected profit as well (at least, as things stand).
I’ve also got one eye on the long-term outlook. With copper and lithium likely to be short supply as the world transitions to green energy, Rio Tinto might just find itself in a purple patch before long. That could mean some big hikes in the amount of money returned to shareholders.
Big dividend stock
Throwing all of my cash at just one business is asking for trouble. For this reason, I’d be tempted to also buy stock in a completely different firm like Legal & General (LSE: LGEN). It’s currently yielding a monster 9.5%.
The valuation is similarly compelling. The shares trade at 12 times earnings, reducing to nine in FY25.
Now, analyst projections should be taken with a pinch of salt. Any unexpected economic wobble will send the City folk scrambling back to their calculators.
I’m also conscious that this year’s profit won’t cover that eye-watering dividend. That would be worrying if it continued into 2025.
Then again, Legal & General has been remarkably consistent in raising the amount of cash it’s sent out since the Great Financial Crisis. So, a big cut isn’t nailed on.
When combined with the fact that an ageing population is growing increasingly aware of the need to plan for the future, I reckon the attractions far outweigh the risks.
Defensive demon
A final dividend share I’d consider buying is medicines-maker GSK (LSE: GSK).
That might seem a strange pick. GSK’s yield is ‘just’ 3.8% — significantly lower than the other two stocks. So what’s to (really) like?
Well, it goes back to what I touched on earlier. Spreading my money around different sorts of companies will ensure I’m not left in the lurch if the odd one is forced to ‘revise its policy’ on dividends — that is, stop distributing them!
Since we all get ill from time to time, pharmaceutical firms are some of the most defensive stocks going. This also makes a price-to-earnings (P/E) ratio of 10 a potential bargain.
Bringing new drugs to market isn’t easy or cheap and failures can impact sentiment for a while. But the opposite is also the case. Shingles vaccine Shingrix, for example, has been a huge recent money-spinner for GSK.
Added to this, the aforementioned yield is still more than I’d get from holding a FTSE 100 tracker fund.
This post was originally published on Motley Fool
