The FTSE 100 index is rammed full with companies that look undervalued, many of which are trading on cheap valuations while offering outstanding dividend yields.
Here are three stand-out stocks that offer market-beating yields with the potential to provide a solid passive income stream.
Royal Dutch Shell
The share price of the oil giant Royal Dutch Shell (LSE: RDSB) has taken a huge plunge recently, decreasing by around 24% since July 2019. Lacklustre fourth-quarter performance was the catalyst for the most recent drop, which is in part thanks to lower oil and gas prices.
However, it is well worth noting that the company has notoriously refused to cut its cash returns since the end of the Second World War. Moreover, the fact that this year’s payout should be covered 1.4 times by profit provides reassurance of the sustainability of the company’s dividends even despite the substantial drop in price.
Evidently, there is significant value to be had. Combine this with a colossal dividend yield of 7.4%, and it becomes clear that Shell offers an attractive stream of passive income.
Global banking heavyweight HSBC (LSE: HSBA) boasts a market cap totalling £118.08bn. Despite this, the firm is trading at a comparatively large discount to other blue-chip companies in the index, owing to numerous geopolitical factors that have negatively affected its price.
A thumping dividend yield of 6.69% means that for every £100 invested, you’re receiving £6.69 just for owning shares in the company! On top of this, HSBC has increased its payout seven times over the past 10 years and has a dividend cover of 1.41, meaning that the current payout is sustainable.
The vastness of HSBC’s operations provides a level of stability that gives added resilience when it comes to maintaining dividends throughout the economic cycle.
Ultimately, once the bargain entry price is factored in, I believe that now is an ideal time to buy shares in HSBC and start reaping the benefits that come with a passive income stream.
Vodafone (LSE: VOD) is one of the index’s best income stocks, supporting a dividend yield of 5.25% at the time of writing.
That said, a rough past few years has seen the company struggle with stagnating revenue growth and rising debt. However, it is evident that Vodafone is making progress in regards to these issues by cashing out of non-core markets and using the money generated from sales to reduce debt.
Vodafone has finally reduced its unaffordable dividend payout, which should now give the company the ability to positively cover its dividends with the profit it generates. This ensures that dividend growth and consistency should be sustainable over the long term, something that is very attractive to income investors.
All things considered, I believe a positive outlook and a re-adjusted dividend payout classify the company as a strong ‘buy and hold’ for anyone looking to build a passive income stream over the long term.
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Matthew Dumigan does not own any shares in the stocks mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.