After 35 years of investing in shares, I really appreciate the wisdom of Warren Buffett. The billionaire investor has inspired generations of investors with his superb sayings. Recently, one really hammered home the point of investing to me. Buffett remarked: “Rational people don’t risk what they have and need for what they don’t have and don’t need.” As an older investor, I know exactly what the Oracle of Omaha means. For me, this means don’t take excessive risks to generate decent returns. That’s why I’m always bargain-hunting in the FTSE 100 index for value shares paying decent dividends. Here are three Footsie stocks that I’m considering adding to my portfolio for extra passive income.
FTSE 100 share #1: IMB (8.6%)
My first FTSE 100 dividend darling is Imperial Brands (LSE: IMB). As the world’s fourth-largest tobacco company, this is not a stock for ethical investors. But this Bristol-based business is 120 years old, operates in 12o markets, and employs 27,500 people in 38 factories. Its popular cigarette brands include Davidoff, Gauloises, JPS, Kool, West, and Winston. ‘Imps’ sells 330bn cigarettes yearly in 160+ countries. This £15.2bn firm generates huge cash flows and pays fat cash dividends to shareholders. At Friday’s closing price of 1,608.5p, this stock trades on a lowly price-to-earnings ratio of 5.5 and an earnings yield of 18.2%. The dividend yield of 8.6% is among the highest on the London Stock Exchange. IMB’s net debt exceeded £10.3bn in 2020, which could be an issue. But I see it as manageable. I don’t own IMB today, but I’d like to.
Dividend stock #2: MNG (7.4%)
On 30 September 2020, I argued that shares of investment manager M&G (LSE: MNG) were a real bargain. I said this FTSE 100 stock was incredibly cheap and surely mispriced at 159.5p. On Friday, the M&G share price closed at 245.6p, soaring more than half (+54%) in under nine months. Even after this surge, I still view M&G as a decent candidate for generating additional passive income. I said back in September that “M&G is a safe, solid, and even boring” share. Being a major asset manager in rising stock markets is highly profitable. That said, M&G faces stiff competition from bigger global players. Today, M&G shares trades on a price-to-earnings ratio of 5.6 and earnings yield of 17.9%. The dividend yield of 7.4% a year is double the FTSE 100’s prospective 2021 yield. I don’t own £6.4bn M&G, but it’s on my buy list.
Income share #3: VOD (5.9%)
My third income-generating champion is a household name: Vodafone Group (LSE: VOD). The £36.2bn telecoms group has 625m customers in 65 countries. On 10 May, this FTSE 100 share hit a 52-week high of 142.74p, but closed at 129.84p on Friday. Thanks to Covid-19, Vodafone’s 2020 results were disappointing, but it expects to bounce back in 2021/22. And while Vodafone’s profits recover, its huge cash flows continue to fund hefty cash dividends. At the current share price, this Footsie heavyweight offers a dividend yield of 5.9%. That’s over two percentage points higher than the FTSE 100’s dividend yield. Furthermore, in 2020, Vodafone paid out the fourth-largest total dividend among all UK-listed shares. Vodafone cut its dividend by two-fifths (40%) last year, which was a painful blow. But this previous deep cut makes the rebased dividend more sustainable, so it could rise over time. However, Vodafone’s free cash flow declined in 2020/21, while its capital expenditure climbed significantly. I don’t own VOD yet, but it’s on my buy list.
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.