How I’d invest £500 in dirt-cheap stocks for a steady passive income

I know the title of this article could sound like I am selling a dream. But I am not. As an investor, I am constantly looking for good stock deals that can also provide me with an additional stream of income. Turns out, that there are plenty of them around that can hold me in good stead over the long term. 

There is one catch, though. In my experience, typically when I buy dirt-cheap stocks, it takes some time before their share prices start rising again. There are a number of reasons why this can happen. But one of them is their near-term outlook. So, for instance, the stocks that did very well during the lockdowns, are among the losers now. Think about food delivery apps like Just Eat Takeaway or industrial metal miners like Rio Tinto as examples.

FTSE 100 miners have high dividend yields 

But, if I am happy to invest £500 today for the long haul, I have a good chance of making some pretty sweet gains over time. And also earn a solid passive income. Among FTSE 100 stocks, I would most closely consider mining stocks. They have among the best dividend yields around, and they are currently seeing share price weakness as well. While their dividend yields can be as high as north of 10%, their price-to-earnings (P/E) ratios are at sub-10 times. 

The outlook for commodities is no longer as robust as it was last year. This is expected to impact demand for them. But if I am willing to hold these otherwise healthy stocks in my investment portfolio for a few years, I have little doubt that they could earn me capital gains. Stocks like Anglo American and Rio Tinto look particularly good to me right now.

FTSE 250 financial services stocks look promising

Among FTSE 250 stocks, at present I like financial trading platforms like CMC Markets and Plus500. Much like mining stocks, they did really well last year as trading and investment activity increased during the lockdowns. However, this year, they too are seeing some moderation, which is reflected in their results. 

I think this only adds to their attractiveness though. Because these are cheap too, in P/E terms, and offer healthy dividend yields. In fact, news has just come in that CMC Markets could be split up into two, which is expected to be beneficial for shareholders as well. 

My takeaway

Of the five stocks I have talked about here, three are already in my portfolio. To me, they look like great stocks to invest in, that can earn me a passive income as well as ensure that my capital grows over time. They are cyclical, which means that they are closely linked to economic activity. So, during regular slow-downs they could be impacted. But then they are also extremely promising for cycles of expansions. And I believe we are getting into one as the recovery gets more firmly underway. With £500 to invest, I’d buy more of these stocks. 

Manika Premsingh owns shares of Anglo American, CMC Markets and Rio Tinto. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.