2020 was a brutal year for investors aiming to generate passive income from share dividends. In 2019, cash dividends paid by UK-listed shares totalled a record £110bn. Last year, this figure collapsed to perhaps £60bn, thanks to Covid-19. But as dividends are restored, this year’s total could top £70bn. Remarkably, just five cheap shares now pay a third of all UK dividends. I’d buy these three FTSE 100 dividend dynamos today to generate a lifelong income for my ISA.
Cheap share: Rio Tinto
With banks and oil producers slashing or cancelling their dividends, global miner Rio Tinto (LSE: RIO) should pay the FTSE 100’s biggest dividend by size last year. The Anglo-Australian group is an absolute Goliath of a business, selling iron ore, copper, diamonds, gold and uranium around the globe. For 2020, I expect Rio’s cash pay-out to exceed £5bn, making it the Footsie’s dividend king. Yet Rio’s cheap shares look attractive to me.
As I write, Rio’s stock trades around 5,981p, valuing the group at £101bn. At this level, Rio trades on a price-to-earnings ratio of 18.5 and an earnings yield of 5.4%. Rio’s dividend yield is a chunky 5% a year, almost two percentage points higher than the FTSE 100’s 3% yield. With Rio poised to generate a torrent of cash this year, I see its shares as a firm buy for my income portfolio.
Dividend darling: BAT
Among dividend stocks, British American Tobacco (LSE: BATS) is like Marmite: you either love it or hate it. As the world’s second-largest cigarette manufacturer, BAT is obviously a no-no for ethical investors. But this business has been around since 1902 and has been a core holding of many income portfolios for decades. What’s more, its cheap shares are no more expensive today than they were in late March. This suggests to me that they may be a bargain.
At the current share price of 2,756p, BAT is valued at £62.61bn, making it #7 among the FTSE 100’s giants. A year ago, the BAT share price was riding high at £35, so today it’s at an £8 discount to this peak. At present, BAT stock trades on a price-to-earnings ratio of 10 and an earnings yield of 10%. Even better, BAT’s dividend yield is a whopping 7.7% a year, making its cheap shares a champion provider of passive income to me.
Income hero: Vodafone
My third and final dividend darling is Vodafone Group (LSE: VOD). A household name in telecoms since the Nineties, Vodafone has 625m customers in 65 countries. Yet on 4 September last year, Vodafone shares had slumped to close at 87.1p, their 2020 low. Since then, they have rebounded strongly, but these cheap shares still offer value for income-seekers like me.
As I write, the Vodafone share price hovers around 128.28p, valuing the group at £33.5bn. But Vodafone’s huge cash flows make it very tempting for income investors. Right now, its shares trade on a price-to-earnings ratio of 16.4 and an earnings yield of 6.1%. Vodafone’s dividend yield of nearly 6.6% a year is more than double that of the FTSE 100 index. Also, Vodafone was the Footsie’s #4 dividend payer by size in 2020, making it a stalwart of income funds.
In total, these three giants should pay out more than £12.5bn in regular cash dividends in 2021. That’s why I’d eagerly buy all three today, ideally inside my ISA to enjoy a lifetime of tax-free income.