3 cheap shares I bought for high passive income
I’m a big fan of passive income — unearned income that doesn’t come from working. But I get little income from savings interest, bonds, and property. Instead, I rely on share dividends for my passive income.
Three shares for big passive income
Our newest family portfolio includes these three shares with high passive income yields:
1) Aviva (6.7%)
Aviva (LSE: AV) is a huge UK insurer and a household name. After its shares plunged last summer, my wife snapped them up at a bargain price of 397p. Here’s how this stock stacks up today:
To me, Aviva shares still look inexpensive with their earnings yield of 11%, versus under 7% for the FTSE 100. Also, their dividend yield of 6.7% a year easily beats the Footsie’s sub-4% cash yield. And it’s covered 1.7 times by trailing earnings, which is a decent margin of safety.
Though Aviva shares have risen by 11.9% since we bought, I’d happily buy more for their market-beating cash yield — if I had enough spare cash, that is.
2) Legal & General
Legal & General Group (LSE: LGEN) is a leading provider of life insurance, savings, investments, and pensions. The group has over 10m customers and manages £1.3trn in assets.
My wife bought L&G shares last July at under 247p. During September and October, they tanked when investors were spooked by Liz Truss’s mini-Budget. But they look good value to me today, based on these attractive fundamentals:
At over 13%, L&G’s earnings yield is huge (almost twice the FTSE 100’s). This allows it to pay a whopping passive income of 9.3% a year in cash dividends. And though this payout is covered only 1.4 times by earnings, the group didn’t even cut these payments during 2020’s Covid-19 crisis. Again, if I had money to spare, I’d snap up more L&G shares at current levels.
3) Rio Tinto
Shares in Anglo-Australian mega-miner Rio Tinto (LSE: RIO) have been a roller-coaster ride in 2022/23. In June, my wife bought Rio shares at 5,204p and — sure enough — they dived, hitting their 52-week low on Halloween. But they have since rebounded strongly, as my final table shows:
Despite having surged by more than a third (+36.5%) since 31 October, Rio Tinto shares still look pretty cheap to me. Their earnings yield of nearly 15% enables the metals miner to pay a dividend yield of 8.8% a year. Though this is one of the highest passive incomes on the London market, it’s still covered more than 1.7 times by earnings. That’s heading for rock-solid, in my opinion.
However, I know from experience that mining profits go in cycles, sometimes from boom to bust. Indeed, Rio Tinto did cut its dividend during 2016’s commodity crash. Even so, as a £103bn super-heavyweight, I expect Rio to ride out the next crash better than smaller miners!
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Cliff D’Arcy has an economic interest in Aviva, Legal & General Group, and Rio Tinto shares. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2023