Cheap FTSE 100 shares: a rare chance to boost passive income!

Dr James Fox details how he’d transform his portfolio’s income-generating capacity by investing in discounted, high-yielding FTSE 100 shares.

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FTSE 100 shares are well represented in my portfolio. And one reason for this is the wealth of high-yielding dividend stocks on the index.

I also believe the index hosts tens of undervalued stocks. Of course, big dividends and low share prices are linked — when share prices fall, dividend yields rise.

Today, I’m exploring some of the top dividend stocks on the FTSE 100 focusing on discounted sectors, namely financials and housebuilding. This is where I’m going to find the best bargains and highest yields.

I’ve actually topped up my positions in all three of these stocks in recent weeks. So let’s explore how investors could transform their passive income generation.

  • Dividend yield: 8.4%
  • Dividend coverage: 1.98
  • Price-to-earnings: 6

Legal & General (LSE:LGEN) is often overlooked by investors. It doesn’t offer much in the way of share price growth, but rewards investors with a sizeable dividend yield — one of the largest on the index.

It’s a pretty solid and steady FTSE stalwart but, going forward, we can expect the company to benefit from positive trends in bulk purchase annuity — insurance policies that are purchased by pension scheme trustees.

One concern is the recent performance of LGIM — the investment arm. Operating profit fell to £340m from £422m over the 12 months to December. But I’m confident things should pick up in 2023.

Phoenix Group

  • Dividend yield: 8.75%
  • Dividend coverage: 1.6
  • Price-to-earnings: 7.07

Phoenix Group (LSE:PHNX) is the UK’s largest long-term savings and retirement business. The stock hasn’t really recovered since the Silicon Valley Bank fiasco that engendered a broader selloff of financial stocks.

But it remains a solid and steady business. In 2022, adjusted operating profits grew to £1.24bn, up from £1.23bn in 2021. This solidity in underpinned by a tried and tested business model. The company traditionally focuses on acquiring and managing closed products until maturity.

A worry is the declining dividend coverage. According to Hargreaves Lansdown data, coverage has fallen from 1.93 in 2020, to 1.62 in 2021, and 1.6 in 2022. Despite this, I see Phoenix Group as an overlooked, but excellent buy.

Vistry Group

  • Dividend yield: 7.1%
  • Dividend coverage: 2.5
  • Price-to-earnings: 5.6

Vistry Group (LSE:VTY) is among the best performing housebuilders. That’s not because it’s somehow immune to the challenges experienced by in private sales market, but because the company also has a sizeable ‘partnerships’ business. This side of the group builds affordable homes, providing some insulation against broader market conditions.

Having said that, conditions in the private market appear to be improving. House prices haven’t fallen as much as anticipated and demand has demonstrated some resiliency.

The worst of the pricing adjustment appears to be behind us,” Richard Donnell, executive director at property search website Zoopla, recently told The Financial Times.

Of course, interest rates rose again last week, and that’s not likely to be positive for demand in the short term. But the Bank of England signalled we may be near the terminal rate soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Hargreaves Lansdown Plc, Legal & General Group, Phoenix Group Holdings, and Vistry Group Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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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