Dividend stocks provide the perfect opportunity to boost passive income and earn without even lifting a finger. These two cheap dividend stocks have high yields, and they are likely to be trading below their fair value – showing good growth potential and giving me the best of both worlds!
A robust passive income stock
The FTSE 100 insurance and capital management giant Legal and General (LSE:LGEN) offers an impressive and consistent 6.9% yield. The company prides itself on delivering a comfortable dividend, and last lowered it 14 years ago in 2008. Unlike some other high-yield stocks, L&G doesn’t sacrifice financial health for a high dividend with the company still retaining 50% of earnings to pump back into operations and retain future growth.
I also believe Legal and General shares to be slightly undervalued with good growth potential over the next few years. They are currently trading with a low price-to-earnings ratio (P/E) of 6.8 and a fair price-to-book (P/B) of 1.5. Regardless of what the next few years bring, I am confident there will remain strong demand for its pension services as the UK’s population continues to age.
Of course, there are some risks with this FTSE 100 dividend stock that must be considered. Due to having over £1trn in assets under management in its investment division, the company’s income would be affected if a stock market crash was to materialise. However, Legal and General has diversified into several different business areas, which helps to mitigate extreme risks linked to stock market performance. As a result, I believe L&G is a strong dividend stock, and I am increasing my holding by a small amount to boost my passive income in 2022.
A 9.5% yielding mining giant
The global FTSE 100 mining behemoth Rio Tinto (LSE:RIO) is treating shareholders to an incredible 9.5% dividend yield – one of the largest for all Footsie shares. It has profited from a recent surge in metal prices such as lithium, which looks to continue as the world shift towards lithium-demanding electric vehicles. Concerns about supply disruption from the Ukraine-Russia conflict sent metal prices higher last week and look to prop them up over the coming months.
This dividend stock is trading at a low P/E value of 6.25 and, with £12bn in cash and short-term investments, the company has the liquidity and mobility to protect or invest over the next few months.
As with most of the mining industry, Rio Tinto is extremely vulnerable to external factors such as commodity prices, regulation and global politics, which can increase the volatility of the stock. I also do consider Rio Tinto’s 60% dividend pay-out to be slightly high for my liking as it could indicate the dividend to be slightly unsustainable.
I still believe that the passive income opportunities of this cheap dividend stock outweigh the long-term risks, though, and I will be opening a very small position in the stock as a result.