After 35 years of often ‘hit and miss’ investing, my investment strategy is mostly written in stone nowadays. I’ve become an old-school value investor, which means I aim to buy lowly rated shares with high earnings yields and market-beating dividend yields. That’s because history shows that up to half of the long-term return from UK shares comes from reinvesting cash dividends. So here are two cheap FTSE 100 shares that I don’t own today, but would gladly buy for their generous cash pay-outs.
Top dividend yields #1: Rio Tinto
The first of my FTSE 100 shares offering market-thrashing dividend yields is Anglo-Australian mega-miner Rio Tinto (LSE: RIO). As a leading global supplier of iron ore, aluminium, copper, and lithium, Rio has benefitted from steeply rising metals prices in 2020-21. As a result, its cash flows and earnings have skyrocketed, allowing it to return huge sums to happy shareholders in cash dividends and share buybacks.
For 2021, Rio paid out dividends totalling $16.8bn (£12.7bn) — the second-largest dividend payout by size in UK market history. At its current share price of 6,104p, Rio is a Footsie giant valued at £102.3bn. Yet Rio shares trade on a lowly price-to-earnings ratio of 6.2 and a bumper earnings yield of 16.2%. Its dividend yield of 9.5% a year is one of the highest on the entire London Stock Exchange. Though history has demonstrated that dividends from mining companies can be very volatile, I’d happily add Rio to my family portfolio today.
High cash yields #2: M&G
My second cheap FTSE 100 share paying generous dividend yields is investment manager M&G (LSE: MNG). M&G has a storied pedigree: it was founded in 1931 and launched the UK’s first mutual fund that year. Until October 2019, M&G was part of Prudential group, before it was listed as a separate company. M&G shares have been fairly volatile over the past 12 months, varying from a low of 168.69p to a high of 254.3p. Currently, the share price hovers around 225p, valuing this FTSE 100 firm at nearly £5.9bn. This makes M&G small fry when compared to giant rivals, such as American fund managers. But I’m drawn to M&G’s rising dividends, which were 15.77p in 2019, 18.23p in 2020, and 18.3p in 2021. At the current share price, M&G shares offer a tempting dividend yield of over 8.1% a year. That’s roughly twice the cash yield of the wider FTSE 100 index. That said, company dividends are not guaranteed and can be cut or cancelled at any time. However, in its latest set of results, M&G’s board committed to raising its dividend over time. Hence, despite recent market volatility, I’m going to add M&G to my family portfolio for its powerful dividend yield!