Over the past month, the FTSE 100 index has jumped by 7.2%, reducing its 2022 decline to 0.9%. Adding in cash dividends, the Footsie has produced a positive return in 2022. Yay.
I see the FTSE 100 as cheap
Last month, the valuation gap between UK and US stocks hit a record high. Thus, I regard quality UK shares as trading at bargain prices. Here are two stocks I’ve bought for market-beating cash dividends and long-term capital gains.
Lloyds Banking Group
My first cheap share is perennial value stock Lloyds Banking Group (LSE: LLOY). On Friday, the Black Horse bank’s shares closed at 43.52p, valuing it at £29.3bn. This seems a modest price tag for a leading lender with 26m customers.
At its 52-week high on 17 January, Lloyds share price hit 56p. But the Ukraine war sent share prices slumping, so this stock is down 11.2% over the past year. And though the shares are up 11.8% in a month, we won’t be selling any Lloyds shares for now.
At the current price, this FTSE 100 share trades on a price-to-earnings ratio of 7.2, for an earnings yield of 13.8%. But what draws me to Lloyds is its decent dividend yield of 4.9% a year. Furthermore, this cash yield is covered over 2.8 times by earnings. Then again, 2023 is looking like a difficult year for British banks.
Sky-high inflation, crippling energy and fuel bills, and rising interest rates are slashing disposable income. In addition, the risk of a recession is growing, plus consumer confidence is testing record lows. If next year does turn into something of a horror show, this would be bad news for Lloyds. But we bought this FTSE 100 share for the long term, so we’re braced for more volatility along the way.
Rio Tinto
Shares in Anglo-Australian mega-miner Rio Tinto (LSE: RIO) closed at 5,398p on Friday, after leaping 250p (+4.9%). This followed rumours that strict lockdowns in China’s cities may be eased. As the world’s workshop, China is the leading global consumer of base metals. Hence, if the Middle Kingdom’s economy rebounds, this may boost Rio’s sales of aluminium, copper, iron ore and zinc.
Almost a year ago, Rio Tinto shares hit a 52-week low of 4354p on 18 November 2021. They then soared to peak at 6,343p on 3 March, before falling steeply. Despite its volatility, this share has risen by 17.4% over 12 months.
At the current share price, Rio is valued at a whopping £88.1bn, making it a FTSE 100 powerhouse. Yet this stock looks too cheap to me on fundamentals. Its price-to-earnings ratio of 5.8 translates into a bumper earnings yield of 17.2%.
At 9.8% a year, Rio Tinto shares offer one of the highest dividend yields in the London market. Even better, this is covered 1.8 times by earnings, offering solid support for this payment. Hence, I don’t mind banking a nearly double-digit cash yield while waiting for the global economy (and Rio’s shares) to recover.
However, in the event of a deep recession, Rio’s revenues, earnings and dividends could take a big beating. Indeed, it last cut its dividend in 2016. But we’re willing to shoulder those risks for long-term rewards!
