After the latest figure for UK inflation came in lower than expected, the FTSE 100 index leapt. As I write on Wednesday afternoon, it is up 2.2% on Tuesday’s close, boosted by rate-sensitive stocks.
Even so, I regard the UK’s blue-chip index as very undervalued right now. It trades on a lowly multiple of 10.5, for an earnings yield of 9.5%. Meanwhile, a dividend yield exceeding 4% a year provides a valuable source of income for patient investors like me.
Three FTSE 100 shares I’d buy for income
Speaking of income, here are three undervalued Footsie stocks I already own that I’d gladly buy more of for their dividend-generating power (sorted in order of highest to lowest cash yield):
| Company | Sector | Share price | P/E ratio* | Dividend yield | Dividend cover |
| Vodafone | Telecoms | 73.64p | 7.2 | 10.5% | 1.3 |
| Legal & General | Asset management | 237.2p | 6.5 | 8.2% | 1.9 |
| Rio Tinto | Mining | 5,085p | 8.7 | 8.0% | 1.4 |
Here’s how these three high-yielding shares have performed over one and five years, respectively (all figures exclude dividends): L&G: -6.7%, -11.1% | Rio: +8%, +24.4% | Vodafone: -43.9%, -58.6%
The biggest dog of the three is Vodafone (LSE: VOD), whose shares have crashed hard over 12 months and five years. Yet I have a hunch that the telecoms giant could be poised to turn the tanker around under its new CEO, Margherita Della Valle.
However, one big problem is that the group’s dividend is covered only 1.3 times by historic earnings. Hence, new broom Della Valle may decide to ‘kitchen sink’ Vodafone’s problems in 2023, perhaps cutting this precious payout at the same time.
Future Footsie winners
As for Rio Tinto (LSE: RIO), its cash payout is also covered by a low multiple of earnings — just 1.4. What’s more, the mega-miner previously cut its dividend in 2016 and 2022. And with metals prices weakening this year, 2023’s earnings will be lower than 2022’s.
Despite this, I see Rio Tinto as a long-term ‘buy and hold’ stock for my family portfolio. As well as generous dividends, I hope to enjoy strong capital growth from this FTSE 100 share over the next decade.
Finally, my pick of this trio is insurance group and asset manager Legal & General (LSE: LGEN). This quality business is run by excellent management and has a long history of raising its dividend payments.
What’s more, L&G didn’t even cut this shareholder payout during 2020/21’s Covid-19 crisis. In addition, L&G’s cash stream is covered almost twice by trailing earnings, so it looks pretty safe to me.
In summary, I’d gladly buy more of all three of these FTSE 100 dividend dynamos today — if I had any cash to spare, that is!
