With the cost of living galloping higher and savings accounts paying a pittance, I’m tempted to funnel any spare cash I have into cheap dividend shares in the FTSE 100.
Today, I’m looking at three examples that, collectively, could generate an average yield of 9.9%! Too good to be true? Here’s my take.
Phoenix Group Holdings
Phoenix Group Holdings (LSE: PHNX) is my first stop. The owner of Standard Life has around 13 million customers on its books. This makes it the largest long-term savings and retirement business in the UK.
At face value, this is not a business that gets my pulse racing and makes me want to buy the stock. This is until I look at the potential dividend stream on offer.
Analysts believe Phoenix will dish out 49.9p per share this year. At today’s share price, that becomes a juicy yield of 8.1%, covered roughly 1.5 times by profit. By comparison, the FTSE 100 index as a whole returns ‘just’ 3.5%. The valuation is equally tempting. Having fallen by 6% year-to-date, Phoenix trades at 8 times forecast earnings.
My one big concern here is that growth is likely to be fairly muted going forward. As such, a large capital gain on top of the dividends might be asking for too much. This places more significance (and therefore more pressure) on the latter to keep going.
Rio Tinto
Holders of FTSE 100 mining giant Rio Tinto (LSE: RIO) continue to enjoy a superb 2022, so far. Thanks to soaring metal prices, shares have climbed 26% in value.
This would be a great result in itself. However, my primary reason for continuing to like Rio is the dividend stream on offer. Right now, the blue-chip is down to yield an astonishing 10.6% in FY22.
Naturally, a cash payout this big doesn’t come without risk. Commodity markets are notoriously volatile and earnings projections can change on a dime. Mining can also be dangerous, unpredictable and costly work.
Then again, growing my wealth slowly is the Foolish mentality in a nutshell. Rio does stand to benefit enormously from the ongoing drive to renewable energy sources (and the need for essential metals like copper).
Having been bullish on this company for much of 2021, my view hasn’t changed. Although the share price performance may moderate over the rest of this year, I’d still buy today.
Persimmon
Housebuilder Persimmon (LSE: PSN) completes my FTSE 100 dividend share trio. It offers a staggering prospective yield of 10.9%.
Such a massive payout makes me wary. As hot as the housing market currently is, there will come a time when demand (temporarily) moderates. Persimmon’s payout is also barely covered by earnings. This could conceivably make the income stream susceptible to a cut if the sector continues to be hit by rising costs.
On an optimistic note, knowing that the other two stocks mentioned here operate in completely different sectors does give me some protection through diversification. Persimmon’s valuation is hardly excessive either, at just over 8 times forecast earnings. So while there is undoubtedly risk here, the potential rewards arguably outweigh it.
If outpacing inflation and/or generating passive income were my goal(s), I’d be comfortable buying a slice today.