After 35 years of investing, one thing I love is watching my share dividends coming in. Dividends are cash payments paid to company shareholders, typically quarterly or half-yearly. Nowadays, dividends provide almost all of my unearned, passive income. What’s more, dividends account for roughly half of the long-term returns from UK shares. As investment author Josh Peters wrote, “Dividends may not be the only path for an individual investor’s success, but if there’s a better one, I have yet to find it”. Here are three cheap stocks I don’t own, but would buy today for their market-beating dividends.
Passive income stock #1: Rio Tinto
The first of my cheap stocks for passive income is Anglo-Australian mega-miner Rio Tinto (LSE: RIO). At the current share price of 4,684.5p, Rio has a market value of £78bn, making it a FTSE 100 heavyweight. But at its 52-week high, the Rio share price hit 6,639.74p on 10 May 2021. After falling back (and after paying a colossal dividend to shareholders on 23 September), the Rio share price is now trading almost £20 cheaper. Thus, this mega-cap stock now trades on a price-to-earnings ratio of an ultra-low 5.4 and a huge earnings yield of 18.5%. Incredibly, this stock offers a whopping dividend yield of 10.5% a year, almost 2.6 times the FTSE 100’s 4.1%. However, weakening demand in China has pulled down metals prices, so Rio’s fundamentals could be under pressure in 2022. Even so, I still like the look of this Footsie Goliath.
Dividend share #2: British American Tobacco
The second of my stocks for generating extra passive income is British American Tobacco (LSE: BATS). As a leading manufacturer of tobacco, cigarettes, and smoking products, BAT is often shunned by ethical investors. Nevertheless, this high-yielding stock is frequently found in high-income funds and portfolios. As I write, the BAT share price stands at 2,536.5p, down 19.5p
High-yield stock #3: Vodafone
My third UK share for additional passive income is Vodafone (LSE: VOD), a telecoms giant with over 625m customers in 65 countries. Though Vodafone is a popular share in high-yielding portfolios, the stock is down 11.8% over 12 months. At the current share price of 109.11p, Vodafone is valued at £29.8bn — which several analysts consider undervalued in the wider European telecoms market. Vodafone had a tricky 2020-21, thanks to Covid-19. As a result, the group slashed its dividend by two-fifths (40%) last year, which was painful for shareholders. Nevertheless, VOD’s dividend yield of 6.9% a year remains one of the FTSE 100’s highest. And, having been cut in 2020, this cash pay-out should be more sustainable looking ahead. I rather fancy Vodafone as a long-term holding — especially as this stock lies almost 34p (-23.6%) below its 52-week high of 142.74p, set on 10 May 2021!
