FTSE 100 stocks are on the up as investors cross their fingers that inflation is starting to fall, but the index is still full of bargains. The following three blue-chip companies are still on sale at rock-bottom valuations while offering yields of around 8% a year.
The first is insurer and asset manager Legal & General Group (LGEN), which I like so much I bought it last month. At that point, it was paying income of 9.33% a year. With the share price up 5% since then, it’s now forecast to yield 8.7%. That’s still a brilliant rate of income.
Still cheap
Better still, L&G shares remain cheap, trading at just 6.1 times earnings. The obvious risk is a value trap, as L&G shares have gone nowhere for years. They’re down 7.49% over 12 months and 9.57% over five years.
Yet the £14bn company posted profits of £2.52bn last year, up 12%. It should do even better if the stock market recovery continues as this will boost its struggling investment division LGIM. I may buy more when I have the cash.
First, though, I want housebuilder Taylor Wimpey (LSE: TW), which is also trading at just 6.1 times earnings. Its stock has fallen 33.95% over five years and 8.74% over 12 months, as house price crash fears grow.
The UK’s shaky property market will inevitably hit orders, sales and prices. I’m not expecting a meltdown, though, despite the mortgage crunch. Almost 70% of homeowners have cleared their mortgages, while those with outstanding debt are mostly higher earners. New buyers may struggle to find finance but with housing demand outstripping supply, at some point Taylor Wimpey will look oversold.
The board aims to return 7.5% of net assets to shareholders annually, paying a minimum £250m in two equal instalments. Let’s see if that survives today’s crunch. It’s still forecast to yield 7.9% and I’ll buy before November’s payment goes ex-dividend on 23 October.
There’s amazing income out there
British American Tobacco (LSE: BATS) offers one of the highest FTSE 100 yields of all, forecast to pay 9.1% this year, covered 1.6 times by earnings.
The yield looks solid but the share price only seems to fall, as markets write off smoking as a dying industry. Yet as the rise of vaping demonstrates, big tobacco isn’t going to give up without a fight.
The British American Tobacco share price is down 36.64% over five years and 21.62% over one year. There may be further downside, although today’s low valuation of 7.1 times earnings does offer protection.
The prime (if not sole) attraction is that sky-high yield. Management’s dividend policy is progressive, too. In 2018, the dividend per share was 203p. Today, it’s 217.8p and further growth will no doubt come.
Together, my three FTSE 100 stock picks look set to deliver an average yield of 8.57% over the next 12 months.
If I invested my full £20,000 ISA allowance equally three ways, I would get income of £1,714 in year one. With luck, that will rise and compound over time, as the dividends increase. None of this is guaranteed, of course. But even if the Taylor Wimpey dividend is trimmed, this still looks a winning three-way play to me.
