First, I wish all readers a happy and profitable 2021. The year has got off to a good start for UK shareholders. On the first trading day, the FTSE 100 index is up 120 points (1.9%) as I write, having been 3% ahead earlier. Today, Footsie value stocks offer what I believe to be the best bargains for 2021. Here are three of my best shares to buy for a passive income lasting a lifetime.
1) The FTSE 100’s biggest dividend
With cash, bonds and other financial assets offering tiny yields these days, investors like me should look to share dividends for income. And what better than backing the FTSE 100’s biggest dividend payer by a mile? Global miner Rio Tinto (LSE: RIO) is the London-listed company now paying the largest cash dividend in pounds. Rio is a really big beast of a business, generating billions in cash flow to fund dividends, share buybacks and pay down debt.
As I write, Rio shares trade around 5,751p, valuing the Anglo-Australian group at £92bn. This makes it one of the FTSE 100’s super-heavyweights. At this price, Rio’s stock trades on a price-to-earnings ratio of 17 and an earnings yield of 5.9%. At 5.4% a year, Rio’s dividend yield is almost 1.75 times the 3.1% on offer from the wider FTSE 100. This makes Rio an easy pick as a dividend dynamo, I feel.
2) GSK pays 5.8% a year
The second of my cheap FTSE 100 shares for generating passive income is pharmaceutical giant GlaxoSmithKline (LSE: GSK). My family has continuously owned GSK shares since 1989. For a long time, GSK has been our largest individual shareholding. We hang tightly onto it, because GSK is an absolute powerhouse for paying out dividends. One GSK share has paid a steady 80p yearly dividend for each of the past five years. This costs the group around £4bn a year. This is the FTSE 100’s fifth-largest dividend by size, which GSK easily covers from its massive cash flows.
The group’s market value at the current share price of 1,377.6p is a hefty £67.3bn, making it a FTSE 100 heavyweight. At this price, its shares are cheap in historical terms. They trade on a price-to-earnings ratio of 10.6 and an earnings yield of 9.4%. The dividend yield of 5.8% is covered around 1.6 times by earnings, so should be safe and solid for a market-beating income to retire on.
3) Vodafone’s dividend yield is 6.8%
The third of my FTSE 100 dividend darlings is a household name worldwide: Vodafone Group (LSE: VOD). Although not the mega-cap monster it was at the height of the dotcom boom in 2000, Vodafone is still a global leader in telecoms today. What’s more, its commitment to rewarding owners/shareholders makes its dividend #4 by size in the FTSE 100.
At the current share price of 123.64p, Vodafone stock trades on a price-to-earnings ratio of 15.8 and an earnings yield of 6.3%. The dividend yield of 6.8% is around 2.2 times that of the wider FTSE 100, but could come under pressure if earnings stagnate or slide. Even so, with such a large and generous payout on offer, Vodafone is a core holding for many income portfolios. That’s why it’s my #3 pick for a passive income from low-risk shares.
Finally, if I didn’t need the income from these bumper dividends, I could simply reinvest it, buying yet more shares. This makes owning these three cheap shares a win-win situation for patient, long-term investors like me!
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- Passive income: how I’m investing in 2021 and beyond to help fund my retirement
- The top 3 dividend shares I would buy before the year ends
Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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