I could earn £1,400 in passive income by investing a £20k ISA in these cheap FTSE 100 shares!

These cheap dividend shares could take the income I make in my Stocks and Shares ISA to the next level. Here’s why I’m hoping to buy them soon.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We don’t have to break the bank to enjoy market-beating passive income right now. The FTSE 100 alone is packed with excellent cheap shares that are tipped to deliver spectacular dividend income in 2024.

I’m a big fan of Warren Buffett and his strategy of buying undervalued companies (he famously said that “whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down“).

Investing in underpriced stocks gives me a chance to make market-beating capital gains over the long term. Rio Tinto (LSE:RIO), M&G (LSE:MNG) and WPP (LSE:WPP) are three FTSE-listed companies I believe could help me do just that.

They might also help me make a spectacular second income next year, as the table below illustrates.

Company2024 P/E Ratio2024 Dividend Yield
Rio Tinto 9.5 times 6.2%
M&G 9.9 times 9.5%
WPP 7.8 times 5.3%

5.3% dividend yield

Buying these three FTSE 100 stocks would give me an average yield of 5.3%. This is well above the leading index’s forward average of 3.8%.

Rio Tinto is a blue-chip share I already own. And despite the uncertain outlook for commodities demand in 2024, I’m considering adding to my holdings.

I’m expecting profits (and consequently dividends) here to soar as the next commodities supercycle gets under way. Demand for the company’s key metals like iron ore, copper, lithium and aluminium could rise strongly as the green energy transition accelerates, emerging market urbanisation continues, and the tech revolution moves up a notch.

In great shape

As for next year’s dividends, Rio Tinto has a strong balance sheet that should allow it to meet current broker projections. Its net-debt-to-EBITDA ratio stood at just 0.4 times as of June.

Ad agency WPP is also in good shape to pay those large expected dividends in 2024. Next year’s predicted payment is covered 2.4 times over by expected earnings, above the widely-regarded safety benchmark of 2 times.

This provides me as an income investor with peace of mind given current weakness in global advertising spending. And especially as net debt has crept slightly above target more recently.

I remain very confident in WPP’s long-term investment potential. It has the scale and the expertise to exploit the market recovery when it comes, boosted by its long-running acquisition strategy. And I think its focus on the fast-growing digital ad segment will take earnings to the next level.

A £1,400 passive income

Investment manager M&G is the final FTSE 100 bargain I’m looking to buy for passive income. Business conditions remain tougher than usual, but strong capital generation means it should still pay large dividends in the New Year. Its Solvency II capital ratio remained above target at 199% as of June.

This is a stock I’d buy to hold for the long term too. A booming elderly population in the UK and rising concerns over the State Pension should significantly bolster demand for its financial products.

If I invest my full £20,000 ISA allowance equally across these three shares, I would — if broker forecasts prove correct — make a healthy passive income of £1,400 next year. And with some luck I could expect a steadily rising income as they grow their dividends.

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.

Royston Wild has positions in Rio Tinto Group. The Motley Fool UK has recommended M&g 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.

More on Investing Articles

Investing Articles

Here’s the best-performing FTSE 100 stock of the last 10 years

Private equity firm 3i has outperformed the rest of the FTSE 100 over the last 10 years. And its big…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s why Warren Buffett is selling shares (and why I’m not)

Warren Buffett cited tax considerations as his reason for selling shares in Apple. But this isn’t something most UK investors…

Read more »

Investing Articles

What on earth is going on with the AstraZeneca share price?

The AstraZeneca share price has fallen 30% from its peak in August. Dr James Fox explains what’s going on with…

Read more »

Investing Articles

2 high-yield FTSE 100 shares I’d consider buying for passive income…and one I’d avoid

Some FTSE 100 stocks have eye-popping dividend yields. But will the passive income actually be dished out? Paul Summers takes…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 former stock market darlings are trying my patience! Time to sell?

Harvey Jones thought he was getting a bargain when he snapped up these too much-loved FTSE 100 dividend growth stocks.…

Read more »

Investing Articles

Here’s how I’d use £3,000 to target a second income that grows each year

Our writer explains the approach he'd take to trying to build a second income that gets bigger over time, by…

Read more »

Elevated view over city of London skyline
Investing Articles

Is it time to buy this incredible FTSE dividend share?

Christopher Ruane examines one FTSE 100 share with a phenomenal dividend history. Does a steep share price fall this year…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 100 share has just crashed another 20%. Its P/E is now just 9.9 so should I buy?

Harvey Jones was tempted to buy this FTSE 100 share after it crashed in October. Now it's crashed again, it…

Read more »