Forget gold and the Cash ISA! I’d build a £1m portfolio around these 2 dirt-cheap FTSE 100 stocks

Harvey Jones says these two FTSE 100 (INDEXFTSE:UKX) shares offer hugely generous levels of income that more than make up for recent slow share price growth.

| 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.

The FTSE 100 index may have slipped lately, but it remains a great place to invest for your long-term wealth. Building a balanced mix of top UK blue-chip stocks and reinvesting your dividend income for growth, year after year, can put you on the road to building a £1m portfolio.

You won’t get there by leaving money in a Cash ISA where you’ll be lucky to get interest of more than 1-2% a year. The gold price may be rising at the moment but it doesn’t pay any income at all.

I would prefer to buy the following two stocks, which offer hugely generous income streams ranging from 6% to nearly 9%, and are available at bargain valuations.

Royal Dutch Shell

Despite the push towards renewable energy, oil still drives the global economy. I’m as worried about climate change as anybody, but I don’t see its influence changing for years.

Anglo-Dutch oil giant Royal Dutch Shell (LSE: RDSB) pays one of the most reliable dividends of all, as its payout famously hasn’t been cut since the Second World War. It’s a proud record the FTSE 100 major is keen to maintain, which gives you a degree of security even if the oil price continues to fall from today’s $60-or-so for a barrel of Brent crude.

The Shell share price performance has disappointed lately, down 12% in the last year, but this has the benefit of driving up the value of the dividend. The stock currently offers a forecast yield of 6.3%, covered 1.3 times by earnings. That’s three or four times the interest rate on a Cash ISA.

Its falling share price brings another benefit for far-sighted investors. It leaves Shell trading at a dirt-cheap valuation, now just 11.6 times forward earnings, compared to the index average of 17.33 times.

Shell isn’t just an oil company, it’s also pumping money into gas, chemicals, bio-fuels and low-carbon electricity, as part of the wider energy transition. Doubtless, there’ll be bumps along the way, but if the dividends keep rolling in, who cares?

Aviva

Insurance giant Aviva (LSE: AV) is another FTSE 100 stalwart I would buy today and pop into a portfolio with the aim of making £1m over the longer run.

Just like Shell, and many companies right now, recent share price performance has been disappointing – Aviva’s is down 27% over the last year. Yet once again, this benefits investors who like picking up bargain stocks at discounted valuations.

It’s even cheaper than Shell, trading at just 6.2 times forward earnings. That’s a real bargain basement price. The dividend is even more astonishing, as it offers a forecast income of 8.7%, covered a healthy 1.9 times by earnings.

Now there is a danger that management could cut the payout, which is starting to look too generous, but we can still expect the stock to offer a healthy income for years to come.

Too many investors focus on share price growth when buying stocks for their portfolio. Yet, in a world of near zero interest rates, dividend income heroes are the main attraction.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

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

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »