Despite growth this year, there are still a few undervalued dividend stocks with high yields on the Footsie. Sometimes, it feels like the post-2020 stock market crash clearance event has been extended indefinitely.
But hey, who’s complaining? These low prices mean higher dividends for savvy investors.
Here are two FTSE 100 companies that continue delivering excellent dividends, even while the index edges closer to a new high.
HSBC
The UK’s largest bank, HSBC (LSE: HSBA), currently has a 7% dividend yield. The share price has steadily rebounded since the 2020 market downturn, now up by 11.7% over the past five years. There is an expectation of further growth in the coming years, with analysts in good agreement that the stock will rise 22%.
The bank’s forward price-to-earnings (P/E) ratio of 6.9 is below that of peers Lloyds and NatWest. What’s more, the shares are undervalued by 58% using a discounted cash flow model.
But it’s not without risk, though. The primary challenge facing HSBC is linked to China’s economic slowdown and escalating trade tensions between China and the US, particularly in the electric vehicle (EV) sector. These issues are reflected in forecasts. HSBC’s earnings per share (EPS) is expected to continue rising this year but dip in 2025, followed by a mild increase again in 2026. This could disrupt dividend payments if cash flow becomes an issue.
However, after divesting its Canadian operations, the bank should have spare cash available for distribution. Even if the local economy turns sour, it’s in a strong financial position to weather the storm.
I’ve already enjoyed fantastic returns from my HSBC shares and plan to hold them for the long term.
Rio Tinto
Rio Tinto (LSE:RIO) is one of the biggest mining companies in the world, producing critical minerals like copper, lithium, and iron ore. These metals are used in most modern industries today, from housing and construction to technology and renewable energy.
With an ever-expanding population, demand for these minerals is unlikely to diminish any time soon. They’re used to make the batteries for electric cars, laptops, and mobile phones. Naturally, this increases the potential for higher revenues and earnings for miners like Rio Tinto.
On the downside, economic instability can reduce demand for commodities and negatively impact returns. Recently there have been trade challenges in China that adversely affected the company. However, such cyclical risks are inherent in the commodities market, with geopolitical tensions often threatening supply and demand.
Balancing out a portfolio with defensive stocks can help reduce volatility during these periods.
Still, with a forward P/E ratio of 8.6, the shares appear to offer decent value to me. They’re trading at 33% below fair value based on future cash flow estimates, with analysts in good agreement they could rise 24% in the coming 12 months.
In terms of returns, any dividend yield exceeding 6% is particularly appealing, especially when compared to the FTSE 100 average, which is around 3.5%.
I’m yet to add Rio Tinto to my portfolio but I plan to buy stock in the company once I’ve freed up some capital this month.
This post was originally published on Motley Fool
