A cheap dividend stock and an ETF I’d buy to target a £1,200 passive income

Royston Wild believes this FTSE 100 dividend hero and high-yield exchange-traded fund (ETF) could provide a strong passive income for years.

| 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.

Image source: Getty Images

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.

I’m scouring the London stock market for the best dividend stocks and exchange-traded funds (ETFs) to buy today. And I think I’ve found a couple of exceptional candidates for a long-term passive income.

Not only do the following have FTSE 100-beating dividend yields right now. I expect them to provide a large and growing dividend over time.

Here’s why I’d buy them if I had spare £20,000 ready to invest. Based on current dividend yields, they could make me £1,200 in extra income this year alone if I split my investment 50-50.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

A cheap ETF

As its name implies, the L&G Quality Equity Dividends ESG Exclusions UK ETF (LSE:LDUK) focuses on British companies with strong records from an environmental, social and governance (ESG) standpoint.

It invests in a basket of stocks — 38 at the last count — excluding those that have “fundamentally poor balance sheet, income statement and/or ESG characteristics“. While dividends are never guaranteed, the first two can make the fund a dependable source of passive income.

Major holdings here include miners Rio Tinto and Anglo American, financial services providers Lloyds and ICG, and utilities business National Grid. This broad diversification can help it to provide a smooth return over time.

Fund holdings by name and sector.
Source: Legal & General

One drawback with this fund is its low liquidity compared to other ETFs. This can make it trickier and more costly for investors to enter and exit positions.

That said, I still think it’s worth a close look right now. Its dividend yield’s currently 4.5%, around a percentage point higher than the broader Footsie average.

A FTSE 100 dip buy

Created with Highcharts 11.4.3Aviva Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Insurance giant Aviva (LSE:AV.) is a FTSE 100 share I already own in my portfolio. I’m considering upping my stake when I next have cash to invest too, owing to its brilliant value.

You see, Aviva’s share price has fallen sharply from above 500p in the past six weeks. I think this represents an attractive dip-buying opportunity.

As the chart below shows, its dividend yield is double the FTSE 100 average of 3.6%. And it rises steadily over the following two years amid City predictions of dividend hikes.

YearDividend per shareDividend growthDividend yield
202435.43p6%7.4%
202538.11p8%7.9%
202640.83p7%8.3%

On top of this, Aviva shares trade on an undemanding forward price-to-earnings (P/E) ratio of 10.5 times. And its price-to-earnings growth (PEG) multiple sits below the value watermark of 1, at just 0.5.

The financial services firm generates huge amounts of cash, which makes it an attractive target for dividend investors. With a strong Solvency II ratio (205% as of June), it looks in good shape to meet the payout forecasts shown above.

I expect Aviva to deliver a large and growing dividend over time as a growing elderly population drives demand for retirement and protection products. Having said that, intense competition in its markets could impact the firm’s ability to capitalise on this. But I like it all the same.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

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 Aviva Plc and Rio Tinto Group. The Motley Fool UK has recommended Lloyds Banking Group Plc and National Grid 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »