When looking for bargain shares, I’m often drawn to FTSE 100 stocks paying market-beating dividends. Dividends are regular cash distributions paid to shareholders, typically quarterly or half-yearly. Dividends are not guaranteed — many companies cancelled theirs during 2020’s Covid-19 crisis. But once dividends have been paid, investors can choose whether to spend or reinvest them (by buying more shares).
Benjamin Graham, known as as the father of value investing, loved dividends. He wrote, “The true investor…will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.” Furthermore, history shows that reinvested dividends can account for up to half of stocks’ long-term returns. Hence, here are three FTSE 100 shares I don’t own today, but would happily buy for their dividend-generating prowess.
FTSE 100 share #1: Rio Tinto
Rio Tinto (LSE: RIO) is one of the world’s largest miners. In 2020, it had 60 mining projects across 35 countries, employing 47,500 workers. Founded in 1873, it sells iron ore, aluminium, copper, lithium, and diamonds to over 2,000 companies worldwide. These operations generate huge cash flows, profits, earnings, and dividends for shareholders.
At the current share price of 5,399p, Rio’s market value is £88.9bn, making it a FTSE 100 mega-cap member. Yet this Anglo-Australian company’s shares look cheap to me right now. They trade on a price-to-earnings ratio of 6.4 and an earnings yield of 15.6%. They also offer a dividend yield of 9.1% a year — one of the highest in London. But miners are highly geared to metals demand, which is currently weakening in China.
Dividend stock #2: Imperial Brands
Imperial Brands (LSE: IMB) is a leading supplier of tobacco, cigarettes, and smoking products. Last year, it sold over 330bn cigarettes in 160 countries, including Davidoff, Gauloises, JPS, Kool, West, and Winston brands. Imperial’s origins date back to 1786, but its products harm and kill smokers, so smoking is slowly dying out. Meanwhile, Bristol-based ‘Imps’ (as it’s known in the City of London) generates vast cash flows to repay debt, fund share buybacks, and pay dividends.
At the current share price of 1,539p, Imperial is valued at £14.6bn. Yet its shares trade on a price-to-earnings ratio of 5.2 and an earnings yield of 19.1%. Also, they also offer a dividend yield of 9.0% a year, versus the FTSE 100’s forecast 3.7%. Despite Imperial’s high debt burden, I’m still drawn to its dividend.
Income share #3: M&G
Investment manager M&G (LSE: MNG), once part of the mighty Prudential group, was floated off in October 2019. Thanks to the coronavirus pandemic, M&G had a torrid 2020, with its shares hitting an intra-day low of 86.4p on 18 March 2020. On 30 September 2020, with the share price at 159.5p, I said this FTSE 100 stock was incredibly cheap.
When global stock markets are rising, as they are now, asset managers like M&G should do rather well. Indeed, this FTSE 100 firm’s shares leapt as high as M&G’s share price has since dropped back to 206.43p today, valuing my third dividend dynamo at £5.4bn. This boosts M&G’s dividend yield to a tidy 8.9% a year — in line with pay-outs from Rio and Imperial. Although M&G is small and faces fierce competition from giant US rivals, I still see a solid future for this UK business. In addition, it might even be taken over by a bigger player…