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FTSE 100 shares I’d buy for large and growing dividends

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FTSE 100 shares are arguably still undervalued. It’s often argued UK companies remain cheap when compared to other regions of the world. A spate of recent purchases of UK-listed companies gives some credibility to this argument. A combination of value, as well as income from dividends as they recover and grow post pandemic, have brought these two FTSE 100 shares onto my radar.

Cheap FTSE 100 miner

Rio Tinto (LSE: RIO) is one of the world’s leading mining companies. It certainly won’t be everyone’s cup of tea on ESG grounds, but if I look past that, it’s a FTSE 100 share that strikes me as being good for income.

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The dividend payout has been particularly strong in recent years, with consecutive special dividends pushing up the yield. The current dividend yield is 5.2%, far above the average for the FTSE 100. Projections are the dividend could end up being more like 10%. 

A weaker than expected start to 2021 is a risk I’ll keep an eye on. I think expectations for miners are high as economies reopen following the pandemic. Underperformance will likely hit the share price. Another risk is around the reputational damage caused by blowing up sacred caves in Australia. The incident has had political recriminations and led to executive replacements and a pay revolt from shareholders.

Rio Tinto is certainly not a buy and forget share. The mining industry is too cyclical for that. However, for the next few years it could be a sector that produces strong and growing dividends. More evidence of a commodities supercycle, where commodities do well for an extended period of time, might encourage me to buy the shares.

Steady, defensive company

The insurance company Admiral (LSE: ADM) is a more defensive high-yielding FTSE 100 share. In that way, it would potentially complement the more adventurous Rio Tinto in my portfolio.

Admiral has a dividend yield of 4%, slightly above the FTSE 100 average, but more importantly than that it raised its dividend by just under 44% between 2019 and 2020. That’s an impressive rate of growth for a FTSE 100-listed company. It is a strong sign of confidence from management.

The insurer has a business model that provides it with income no matter what the economic backdrop is. That’s why I believe it will be able to keep paying a large, but also growing, dividend.

Since lockdown, it has performed particularly well financially. The share price has also done well over at the same time. In the year to 31 December 2020, pre-tax profit from continuing operations pushed up 20% to £608.2m. The insurer also gained more customers.

With earnings per share also growing year-on-year, I’m confident that Admiral is a well run company with a profitable future.

Both Rio Tinto and Admiral are FTSE 100 shares that I think could perform well over the coming years. I also happen to think in my portfolio the cyclical miner and the defensive insurer could make a complementary pairing.

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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Admiral Group. 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.

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