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!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.