I think one of the best rewards for investing in the stock markets is the steady stream of passive income it can earn me. And after last year’s dividend drought, now appears to be a good time to pick my future investments. There is a range of dirt-cheap UK stocks that also offer 10%+ dividend yields. In fact, I have made investments in many of these already. But I like to keep it somewhat safe. So I have restricted my search to only FTSE 100 and FTSE 250 stocks. This is because these typically cover quality companies.
A dirt-cheap stock with the best dividend yield around
The FTSE 250 iron ore miner Ferrexpo offers the biggest yield among these, at 12.6%. I bought the stock recently, based on its high dividend yield and my assessment of its future. Like many other industrial metal miners, it has seen a sharp drop in share price in recent months, making it a dirt-cheap stock in my opinion.
Iron prices have been tapering, and forecasters are factoring in even lower prices in 2022, as Chinese demand is expected to slow down. But a downward revision does not mean a price crash. In fact, iron ore price is still elevated compared to last year. And if the economic recovery remains robust, demand can remain strong as well. So I remain optimistic about it.
Highest FTSE 100 dividend yield
There’s a similar story for the stock with the next biggest dividend yield. FTSE 100 metal miner and steel producer Evraz offers a yield of 12.2% and has seen a share price drop in the past few months. Besides a correction in metal prices, the company is also facing higher taxes in its home country of Russia. I reckon these are among the reasons why analysts expect its earnings to decline next year. A drop in earnings can also have a bearing on its dividends.
Even then, its forward dividend yield is expected to be 8.5%, which looks pretty good to me. These projections can be subject to change based on evolving circumstances, but are still a good place to start. Keeping this in mind, I have bought the stock for my income investments.
Promising dividends but delisting due
Another FTSE 100 miner, BHP offers the next highest dividend yield of 11.3%. The Anglo-Australian commodity producer is in fine shape. Both its revenues and net income increased by 42% for the financial year ending 30 June, compared to the year before. But like all other miners, its share price has fallen in the past couple of months, making it quite cheap, though over the past year it is still up over 20%.
There is little not to like about it from the performance perspective, but I have held back from buying the stock because it is planning to get delisted from the London Stock Exchange soon. And the focus of this article is UK stocks, which it technically will not be soon.
A financial services UK stock with high dividends
The FTSE 250 trading platform CMC Markets also offers an 11.3% dividend yield. With a low price-to-earnings (P/E) ratio of 4.4 times, it is one of the cheapest stocks I know of that is otherwise performing well. Its share price saw a steep fall in early September after it reduced its earnings guidance for the financial year ending 31 March 2022.
Even then, I think the crash in its share price has been disproportionate compared to the expected cooling off in earnings. As a result, the attractiveness of the stock has only risen for me and I have bought some of CMC’s shares as well.
Financially healthy but company level challenges persist
Another FTSE 100 miner, Rio Tinto, is the fifth stock to offer 10%+ dividend yields. At 10.7%, there is little doubt that this yield has been pushed up by the recent drop in the Anglo-Australian company’s share price. Like the other miners discussed above, this is at least partly because of greater caution about commodities’ demand.
But it has also been facing its own issues. Recently, it came under the authorities’ scanner for allegedly withholding information about cost overruns for one of its projects. Earlier it had found itself in hot water for destruction of historic aboriginal caves in Australia, which resulted in changes to its top management. Much of its share price progress over the past year has been lost as a result in the last few months. It now has a P/E of 5.5 times only, making it a dirt-cheap stock.
While it is expected that its results may correct next year as well, it will still stay profitable. I also like its long-term potential with regards to lithium, which is required for electric vehicle batteries. And I reckon it will also continue to pay good dividends like it has over the past decade. I hold Rio Tinto in my portfolio.
Of these five stocks, four are miners. These have clearly benefited from the commodity bull run seen since last year. And they have paid dividends generously, resulting in their double-digit dividend yields. But I also like these stocks because they have been dividend payers even before that, for around five years at least. And, they have been in consistently good financial health. This is true for CMC Markets as well, the only outlier in this group of stocks. So, even if there is some moderation to these companies’ results next year, I can still be fairly sure that I will continue to earn a passive income from them.
Moreover, the expected decline needs to be seen in the context of an exceptionally good past year. And this goes for both the miners as well as CMC, which has benefited from increased trading activity by investors during the past year of stock market fluctuations. As long as these companies remain financially healthy, I expect they can provide me with a nice flow of passive income over time if I stick to these investments.
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Manika Premsingh owns shares of CMC Markets, Evraz, Ferrexpo and Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. 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.