I’ve been investing for all of my adult life. I started out at 18 in 1986-87, tentatively buying my first shares while at university. The results of this exercise appeared consistently great — until the Black Monday stock market crash of October 1987. This market downturn — including the FTSE 100‘s worst day ever — cost me roughly a third of my entire wealth at the time. Ouch.
This seismic event — and many other howlers — helped my investment strategy evolve into what it is today. For me, it’s hard to beat the ‘get rich slowly’ scheme of buying FTSE 100 shares paying decent dividends. Here are two Footsie shares that I don’t own, but would gladly buy now for their market-beating passive income.
FTSE 100 dividend stock #1: Rio Tinto
The first thing to note about dividends is that they are not guaranteed, so they can be cut or cancelled at any time. Also, history has taught me that the dividends (and share prices) of mining companies can be very volatile. Even so, I like the look of global mega-miner Rio Tinto (LSE: RIO) for its powerful cash flows, earnings, and dividends. For the record, the Anglo-Australian group paid the FTSE 100’s biggest dividend in 2021 (and the UK’s second-highest ever): a whopping $16.8bn (£12.7bn) in cash. Wow.
Rio digs up and sells iron ore, aluminium, copper, and lithium across the globe. At the current share price of 5,792p, Rio is valued at £97.3bn, making it a FTSE 100 behemoth. But this FTSE 100 share has been as high as 6,788p in 2021-22. Right now, its shares trade on a price-to-earnings ratio of 5.9 and offer an earnings yield of 16.9%. What’s more, their dividend yield of 10% a year is currently the only double-digit cash yield in the FTSE 100. As a lover of passive income for spending or reinvesting, I can’t turn down this yield. Hence, I will buy Rio for my family portfolio very shortly.
Passive income share #2: Imperial Brands
The second of my cheap FTSE 100 shares for passive income is Imperial Brands (LSE: IMB), known as ‘Imps’ in the City. As a smoker most of my adult life, I am sadly familiar with Imperial, a leading tobacco supplier and cigarette manufacturer. Its leading brands include Davidoff, Gauloises, JPS, Kool, West, and Winston.
As Imperial’s products harm and even kill their users, this particular FTSE 100 share is usually shunned by environmental, social, and governance (ESG) investors. But Bristol-based Imperial has been around since 1786 — 236 years and counting –and has a business model I find easy to understand. And cigarette sales actually increased in 2020-21, producing huge cash flows, earnings, and dividends for Imperial’s shareholders.
At the current share price of 1,633.5p, Imperial is valued at just over £15.5bn, making it a FTSE 100 stalwart. At present, these shares trade on a discounted price-to-earnings ratio below 5.5 and a bumper earnings yield of 18.3%. This stock also offers a dividend yield of nearly 8.5% a year — roughly 2.2 times the FTSE 100’s cash yield. Despite the fact that Imperial has over £40bn of net debt, I would buy this share for its superior passive income today!