These high-yield FTSE 100 shares trade on rock-bottom price-to-earnings (P/E) ratios. Should I buy them to boost my passive income?
I can see why tobacco giants like Imperial Brands (LSE:IMB) have strong appeal in tough times like these. Their addictive products remain in high demand even during economic downturns.
Yet I’m not planning to buy such stocks any time soon. Even a low P/E ratio of 6.2 times and a 8.3% dividend yield isn’t enough to tempt me to invest in this particular one.
This is because I buy UK shares with a view to holding for the long haul. And companies like Imperial Brands face a highly uncertain future as strict rules concerning the sale, advertising, and use of cigarettes spread to vaping products.
Research from the American Heart Association last month suggested e-cigs could be as dangerous as tar-filled cigarettes. It’s the latest in a string of reports that cast these new technologies in a bad light. I expect Big Tobacco stocks’ share prices to keep sliding as health worries grow.
Mining giant Anglo American (LSE:AAL) doesn’t offer the gigantic dividend yield of Imperial Brands. For 2023 it offers a reading of 4.6%. But this is a dividend stock I’d much rather buy for my portfolio today.
Demand for commodities is tipped to soar over the next decade. Yet weak new supply pipelines in several of the FTSE share’s key markets (including copper and nickel) mean that huge material shortfalls could occur. As a result, revenues at the business could surge as asking prices for its raw materials move steadily higher.
Buying mining stocks like this can sometimes be a headache for investors. A wide range of problems at the exploration, mine development, and production phases can emerge to damage earnings forecasts.
But I believe Anglo American’s ultra-low valuation — a P/E ratio of nine times for 2023 — more than reflects this risk.
Housebuilder Persimmon (LSE:PSN) is a stock I already hold in my Stocks and Shares ISA. And today it offers solid all-round value for money. The FTSE share trades on an undemanding forward-looking P/E ratio of 12 times. It also carries a mighty 6.1% dividend yield.
The good news is that the house price crash that many predicted has failed to happen. The bad news, though, is that conditions in the market continue to deteriorate.
And given Persimmon’s weak dividend cover (of just 1.3 times for 2023), the payout forecast for this year looks extremely fragile. I’d be looking for dividends to be covered at least two times over by expected earnings.
Industry rival Crest Nicholson’s profit warning today illustrates the huge danger to these companies’ profits in the short term. The FTSE 250 firm said that “trading conditions for the housing market have worsened during the summer”.
I plan to hold my Persimmon shares, as I think the long-term outlook for the housing market remains robust. But I think there are better stocks for me to buy for dividend income this year and next.