Owning stakes in some of the country’s largest companies can be a rewarding source of passive income. I own a number of FTSE 100 shares – and have recently been bargain hunting to add more shares to my portfolio.
Below are two blue-chip shares I bought this month. One has an 8.7% dividend yield and the other currently yields 10.2%.
That means the average yield offered by the pair right now is around 9.4%. That is more than double the average offered by FTSE 100 shares overall at the moment.
Vodafone
My first choice may be one that merits more explanation. That is because I had seen and continue to see some red flags around the company.
The business in question is telecoms giant Vodafone (LSE: VOD).
I have long liked some attributes of this business. It has a well-known and widely recognised brand. it has a strong position in multiple markets throughout Europe and Africa. It has a customer base measured in the hundreds of millions.
But I had been held back by a couple of things. The business performance has struck me as underwhelming, while a large debt pile could pose a risk to the dividend being maintained.
What changed my mind and made me decide to buy?
Last week’s first-quarter trading update was reassuring, with the company reiterating its full-year financial guidance.
Meanwhile, the balance sheet improved solidly last year, with net debt falling by a fifth. That is a significant move in the right direction and I hope it will continue.
On top of that, the valuation has become steadily more attractive. Vodafone shares are selling for pennies and touched a 12-month low in recent weeks. That has pushed the dividend yield up to over 10% and the price to a point I think offers value, even considering the risks.
British American Tobacco
The other FTSE 100 shares I purchased in July were in a company I already held in my portfolio — British American Tobacco (LSE: BATS).
Like Vodafone, its shares hit a 12-month low during the past few weeks. They now yield 8.7%.
But in last week’s half-year report, the company reported ongoing strength. Revenues rose 4.4% year on year. Net cash generated from operating activities grew, while diluted earnings per share more than doubled.
The company also reported a slight decrease in adjusted net debt. But at £37bn, I continue to see that as a key risk to the beefy dividend. The average cost of debt rose from 4% last year to 4.3% due to interest rates rising.
However, management seems to be focusing on reducing debt and brands such as Lucky Strike continue to help the business generate mammoth cash flows.
The long-term risk to revenues and profits posed by declining cigarette usage in many markets remains. But non-cigarette products are growing as a proportion of British American’s total sales revenues.
I think the current price is a bargain for this blue-chip business. I bought more of these shares with the intention to hold them for the long term.
