Buying cheap shares in income-generating businesses is a great way to secure a second income. Currently, several FTSE 100 dividend stocks look like bargain buys to me.
Stock market bears will insist that oversold conditions can last for a long time. However, history shows that, over the long term, brave investors have been handsomely rewarded by investing in undervalued companies with future returns in mind.
So, here’s why I think today is a rare opportunity to buy cheap dividend stocks for passive income.
Shares on sale
First, it’s important to note that past performance doesn’t guarantee future results. There are a number of macro challenges that could derail stock market growth, from climate change to global conflict.
Nonetheless, history is a useful guide. Ultimately, investors have little else to rely on when making predictions about share price growth.
In that regard, I take solace in the fact that the FTSE 100 has a reliable track record of consistently smashing through all-time highs, despite significant drawdowns in times of crisis. Indeed, the index passed 8,000 points for the first time last month.
That said, I’m looking beyond the index. For me, that’s where the real opportunities are — cheap shares that have the potential to rally.
Glencore is a good example. This Footsie mining business and commodity trader currently has a price-to-earnings (P/E) ratio of just 4.4. That’s remarkably low. Over the past 13 years, the stock had a median P/E ratio of 17.5, and at one point it was over 47.3!
There’s a risk today’s figure might flatter the company. After all, there are question marks over the sustainability of the firm’s coal revenues. Nonetheless, with a dividend yield of 9.83%, Glencore shares look like a great value investment opportunity for me if I had some spare cash.
High dividend yields
That takes me to the topic of earning passive income from dividends. Glencore isn’t alone in offering a bumper yield among FTSE 100 shares.
For instance, housebuilder Persimmon is another stock trading at a low P/E ratio measured against its 10-year average. Today, the company’s P/E ratio of 7.33 compares favourably to its median of 11.54 over the past decade.
What’s more, the historic dividend yield is enormous at over 13.3%. Forward estimates are lower, but still impressive, at 5.9% for 2023.
A housing market slowdown is a risk the company faces in the coming months. But I’m bullish on its long-term prospects. That’s because the UK has a chronic lack of housing supply. I can’t see demand for the firm’s services evaporating anytime soon.
The Persimmon share price is down 44% over the past year. Again, if I had spare cash, I think now could be a good time to buy the dip in the company’s shares.
My passive income portfolio
Let’s imagine I secured a 7% yield on my investments. Granted, dividends aren’t guaranteed and can be cut or suspended. Nonetheless, I believe I could achieve a 7% yield with a diversified high-yield portfolio.
If I used my full £20,000 Stocks and Shares ISA allowance, that would translate into a tasty annual dividend income of £1,400.
This really could be a once-in-a-decade chance for me to load up on cheap shares for passive income.
