This week will be prime-time territory for buying shares. That’s because the 2021-22 tax year ends on Tuesday, 5 April and the 2022-23 tax year begins on Wednesday, 6 April. Thus, stockbrokers are braced for the usual last-minute clamour as investors rush to buy shares while stocks last! Although I won’t be racing to fill my Stocks and Shares ISA, I do plan to buy more cheap FTSE 100 shares this month.
What I’m looking for are stocks trading on low earnings multiples and high earnings yields that pay market-beating dividends. Hence, here are three FTSE 100 dividend shares that I don’t own today, but aim to buy this month to add more passive income to my family portfolio.
My three cheap FTSE 100 shares
Here are three FTSE 100 shares that I plan to buy this month (sorted from high to low by dividend yield):
| Company | Sector | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield |
| Rio Tinto | Mining | 6,225.00 | 102.9 | 6.3 | 15.8% | 9.3% |
| Imperial Brands | Tobacco | 1,616.23 | 15.4 | 5.4 | 18.5% | 8.6% |
| M&G | Financials | 221.76 | 5.8 | 68.8 | 1.5% | 8.3% |
Why would I want to own these three FTSE 100 shares? First, because I want to maximise my future dividend income. The dividend yields of these stocks range from 8.3% to 9.3% a year, with an average yield of 8.7% a year. That thrashes the Footsie’s own cash yield of around 4%. Indeed, were I to put £1,000 into each stock, I could collect over £261 a year in dividends (before tax) from this £3,000 investment. Nice.
Then again, I know from long experience that share dividends aren’t guaranteed. Indeed, they can be cut or cancelled at any time. Even FTSE 100 companies sometimes trim their dividends in order to preserve cash flow. M&G only listed on the London Stock Exchange in October 2019, but didn’t reduce its dividend during 2020’s Covid-19 crisis. However, Rio Tinto last cut its dividend in 2016 and Imperial Brands slashed its cash payout in 2020.
The chances of cuts aside, this is a mini-portfolio constructed purely to generate bumper dividends. And the good news is these dividends should be well-covered by earnings at all three companies. Rio’s earnings cover its dividend 1.7 times over, while Imperial’s dividend-cover ratio is almost 2.2. As for M&G, its 2021 earnings were depressed by one-off factors, but are expected to rebound this year. Hence, I estimate its forward dividend-cover ratio at over 1.2 — not as high as I’d like, but not bad either.
Why I love dividends
I’m a big fan of dividends — and particularly FTSE 100 dividends — for two reasons. First, history shows that they can account for up to half of the long-term returns from UK shares. Second, they act as a cushion against falling share prices. For example, a share that pays a yearly dividend of, say, 6% and then falls in price by 4% over a year has still produced a positive return of 2% over that period.
In summary, in these uncertain times, I’m always on the lookout for cheap shares that fit my family portfolio. And buying FTSE 100 shares gives me an extra level of comfort that helps me sleep better at night!
