3 cheap FTSE 100 shares I’d buy for their bumper dividends

Despite a decent 2021 and a good start to 2022, I still view the FTSE 100 as undervalued. Here are three Footsie stocks I’d buy for their generous income!

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So far, 2022 has seen a positive start for the FTSE 100, with the index gaining 2.4% since 2021. As I write, the Footsie is within 4.4% of its all-time intra-day high of 7,903.50 points on 22 May 2018. Were it to gain another 350 points, it would reach a new record. However, over five years, the index has gained less than 5% (excluding dividends). Thus, I still view the FTSE 100 as undervalued in historical and global terms. Hence, here are three high-yielding Footsie shares that I don’t own, but would buy today for their income streams.

FTSE 100 stock #1: British American Tobacco

My first high-yielding FTSE 100 stock is hardly one for ethical, social, and governance (ESG) investors. British American Tobacco (LSE: BATS) is a world-leading supplier of cigarettes and tobacco — addictive and harmful products. Yet about a fifth of adults worldwide smoke, providing BAT with massive cash flows, profits, and earnings. Currently, BAT shares trade at 3,101.09p, valuing the group at £71.2bn — a FTSE 100 powerhouse. Today, this stock trades on 11.5 times earnings and offers an earnings yield of 8.7%. BAT’s dividend yield of almost 7% a year is one of the highest in the Footsie. In 2022, BAT is forecast to pay total cash dividends to shareholders of over £5.2bn. That’s the third-highest pay-out in the UK. As a smoker myself, I’d buy BAT stock today. However, the group faces two future headwinds: declining smoking rates and higher interest rates on its £40.5bn of net debt.

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Dividend share #2: M&G

My second dividend stock is investment manager M&G (LSE: MNG). M&G was part of Prudential until its flotation in October 2019. Prudential’s origins date back to 1848, while M&G launched the UK’s first mutual fund in 1931. As I write, the M&G share price hovers around 218.3p, valuing the company at nearly £2.7bn. Despite global stock markets soaring in 2021, M&G shares have gained only 13.1% over the past 12 months. This is barely ahead of the FTSE 100’s 12.3% rise. M&G’s earnings took a hit in 2021, sending its price-to-earnings ratio soaring to 93.2. However, M&G is one of the highest-yielding stocks on the London Stock Exchange. Its cash yield of 8.4% a year is more than double the FTSE 100’s 4%. It’s this bumper pay-out that attracts me to M&G. However, the group does faces ongoing fee erosion, plus tough competition from giant US rivals in the years ahead.

High-yielding stock #3: Rio Tinto

My third and final FTSE 100 dividend dynamo is miner Rio Tinto (LSE: RIO). Rio Tinto (‘red river’ in Spanish) is a mining Goliath, digging up iron ore, aluminium, copper, and lithium across the globe. Its 60 mining projects across 35 countries generate enormous cash flows, profits, and earnings for this Anglo-Australian business. At its current share price of 5,581p, Rio Tinto is valued at £90.9bn, making it one of the FTSE 100’s largest firms. At present, Rio shares trade on a lowly price-to-earnings ratio of 6.6 and a hefty earnings yield of 15.2%. Also, its dividend yield is a thumping 8.8% a year — around 2.2 times the wider Footsie’s yield. As an income-seeking value investor, I find these fundamentals almost mouth-watering. However, long experience has taught me that mining stocks can be very volatile — and miners often slash their dividends when metals prices slump! Nevertheless, I’d still buy Rio today.

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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.

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