A 5% dividend yield! A Cheap UK Share I’d Buy for a Bumpy Economic Recovery.

 Confidence across UK share markets remains pretty shallow right now. It’s no surprise perhaps as the Covid-19 crisis rolls on and concerns over virus variants grow. Throw in fears over Brexit and resurgent global trade wars, and, well, there’s plenty to keep investor nerves on tenterhooks.

These aren’t issues that will stop me from continuing to invest in my Stocks and Shares ISA, however. Why? Well there are many defensive (and even counter-cyclical) UK shares that should deliver big returns however the economic recovery pans out in 2021.

A bright gold price outlook

Getting a slice of gold in 2021 is, in my opinion, an intelligent investing strategy in this climate. I’d do this by buying UK shares in companies that haul the shiny stuff out of the ground. This gives investors the chance to ride the gold price and to receive dividends in the process.

It’s possible that gold prices might slip this year should the Covid-19 economic recovery take off. But there are myriad reasons, like rising inflationary fears and a lumpy rebound in the global economy following the pandemic, that I think will keep demand for flight-to-safety assets like bullion quite robust.

There’s another reason why gold prices could receive an extra boost in 2021, too. As the World Gold Council notes, physical demand from China — the world’s number one gold market — is set to recover this year. This is built on expectations that government policy will boost the economic recovery there. It’s also because of stimulus measures to boost consumer activity in the Asian country.

A UK gold share on my radar

I personally would buy shares in FTSE 250-quoted Centamin (LSE: CEY) to make money with gold. As I say, buying gold-digging stocks gives one an opportunity to receive dividends as well as making money from a rising metal price. And the forward yield at this particular mining giant is quite spectacular. At 5%, this smashes the broader forward average of around 3% for UK shares.

That bright outlook for gold prices means that City analysts reckon annual earnings will soar at Centamin. A 17% year on year rise is pencilled in for 2021. And this leaves the company trading on a rock-bottom forward price-to-earnings growth (PEG) multiple of 0.8. Conventional thinking deems that any reading of 1 or below makes a UK share seriously attractive from a pure value perspective.

All this makes Centamin a great buy for the here and now, I believe. But don’t think that the business is just a top buy for these uncertain times. The business announced in December that it is undertaking work at its Sukari mine to generate 450,000 to 500,000 ounces of gold per year from 2024. It is also making steps to lop $100m off its gross annual cost base by that date. All things considered, I think this UK share could deliver titanic shareholder returns for years to come.

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 FTSE 100 shares: a 6%+ UK dividend share I’d buy Today.

Largely speaking, 2020 proved a disaster for dividend investing as Covid-19 crushed balance sheets and upended earnings growth. The number of UK shares that cut, suspended, or scrapped shareholder payouts ran into many hundreds.

Many investment gurus expect things to remain tough for income chasers during the first few months of 2021. But they reckon things will start to pick up in the latter half of the year as the economic recovery clicks through the gears. I think now’s a great time to buy UK shares in expectation of big near-term dividends. But investors need to remain careful before splashing the cash as the Covid-19 crisis rolls on.

Telecoms titan Vodafone Group (LSE: VOD) is on course to pay big dividends in the short-to-medium term whatever happens to the global economy. Indeed, City analysts are forecasting earnings growth of 34% and 30% in the financial years ending March 2021 and 2022 respectively. This is thanks to soaring global data demand and the ongoing 5G rollout.

FTSE 100 growth AND dividends

The rate at which data consumption is predicted to soar is quite staggering. The boffins at Ericsson, for example, reckon that mobile data traffic will rocket from around 51 exabytes (or EB) per month at the end of 2020 to 226 EB per month by 2026. The tech titan reckons that “improved device capabilities, an increase in data-intensive content, and more data throughput from subsequent generations of network technology” will drive this eye-popping improvement.

All this bodes well for dividends over at Vodafone. Indeed, City brokers reckon annual dividends will keep growing for the next few years at least. Consequently, for fiscal 2021 and 2022, the FTSE 100 giant carries huge yields of 6.6% and 6.8%.

Now Vodafone doesn’t have robust dividend cover over this period to assuage any investor nerves. In fact, the estimated shareholder payout for this year outstrips predicted earnings! I don’t think investors need to pull their hair out over this, however.

This UK share is a huge cash generator, giving it the balance sheet strength to keep paying enormous dividends. It is expected to generate free cash flow of €5bn this fiscal year. On top of this, the decision to spin off its towers business will boost Vodafone’s cash pile by an extra several billion euros.

An unmissable UK value share

The final reason I like Vodafone shares today is its low earnings multiples. Today the FTSE 100 business trades on a forward price-to-earnings growth (PEG) ratio of 0.6. Conventional wisdom suggests that a UK share trading below a prospective reading of 1 offers spectacular value.

Vodafone’s share price is 15% cheaper than it was at the beginning of 2020. And it’s more than four-tenths cheaper than it was just three years ago. With European service revenues on the cusp of recovering strongly, and data demand in its emerging markets rocketing, I think now’s a great time to buy this mega-cheap UK dividend stock for my Stocks and Shares ISA.

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I would buy these 3 cheap shares to share £12bn in passive income from dividends!

2020 was a brutal year for investors aiming to generate passive income from share dividends. In 2019, cash dividends paid by UK-listed shares totalled a record £110bn. Last year, this figure collapsed to perhaps £60bn, thanks to Covid-19. But as dividends are restored, this year’s total could top £70bn. Remarkably, just five cheap shares now pay a third of all UK dividends. I’d buy these three FTSE 100 dividend dynamos today to generate a lifelong income for my ISA.

Cheap share: Rio Tinto

With banks and oil producers slashing or cancelling their dividends, global miner Rio Tinto (LSE: RIO) should pay the FTSE 100’s biggest dividend by size last year. The Anglo-Australian group is an absolute Goliath of a business, selling iron ore, copper, diamonds, gold and uranium around the globe. For 2020, I expect Rio’s cash pay-out to exceed £5bn, making it the Footsie’s dividend king. Yet Rio’s cheap shares look attractive to me.

As I write, Rio’s stock trades around 5,981p, valuing the group at £101bn. At this level, Rio trades on a price-to-earnings ratio of 18.5 and an earnings yield of 5.4%. Rio’s dividend yield is a chunky 5% a year, almost two percentage points higher than the FTSE 100’s 3% yield. With Rio poised to generate a torrent of cash this year, I see its shares as a firm buy for my income portfolio.

Dividend darling: BAT

Among dividend stocks, British American Tobacco (LSE: BATS) is like Marmite: you either love it or hate it. As the world’s second-largest cigarette manufacturer, BAT is obviously a no-no for ethical investors. But this business has been around since 1902 and has been a core holding of many income portfolios for decades. What’s more, its cheap shares are no more expensive today than they were in late March. This suggests to me that they may be a bargain.

At the current share price of 2,756p, BAT is valued at £62.61bn, making it #7 among the FTSE 100’s giants. A year ago, the BAT share price was riding high at £35, so today it’s at an £8 discount to this peak. At present, BAT stock trades on a price-to-earnings ratio of 10 and an earnings yield of 10%. Even better, BAT’s dividend yield is a whopping 7.7% a year, making its cheap shares a champion provider of passive income to me.

Income hero: Vodafone

My third and final dividend darling is Vodafone Group (LSE: VOD). A household name in telecoms since the Nineties, Vodafone has 625m customers in 65 countries. Yet on 4 September last year, Vodafone shares had slumped to close at 87.1p, their 2020 low. Since then, they have rebounded strongly, but these cheap shares still offer value for income-seekers like me.

As I write, the Vodafone share price hovers around 128.28p, valuing the group at £33.5bn. But Vodafone’s huge cash flows make it very tempting for income investors. Right now, its shares trade on a price-to-earnings ratio of 16.4 and an earnings yield of 6.1%. Vodafone’s dividend yield of nearly 6.6% a year is more than double that of the FTSE 100 index. Also, Vodafone was the Footsie’s #4 dividend payer by size in 2020, making it a stalwart of income funds.

In total, these three giants should pay out more than £12.5bn in regular cash dividends in 2021. That’s why I’d eagerly buy all three today, ideally inside my ISA to enjoy a lifetime of tax-free income.

The post I’d buy these 3 cheap shares to share £12bn in passive income from dividends!

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ExxonMobil, Chevron, and BP Rallied by as Much as 25% in November

November was a very good month for beleaguered oil majors. Here's what drove the advance and why it matters.

What happened

Shares of U.S. integrated energy giant ExxonMobil (NYSE:XOM) rose nearly 17% in November according to data from S&P Global Market Intelligence. That huge price gain, however, was notably less than what the shares of U.S. peer Chevron (NYSE:CVX) achieved, with a huge 25% advance. And Chevron's gain was edged out by the United Kingdom's BP (NYSE:BP), which saw a 26% rally during the month.

So what

The big energy story in November wasn't really about oil, per se, but about the expectation that the world will move beyond the global coronavirus pandemic. Upbeat trial results from three separate vaccines were released, including offerings from Pfizer and BioNTech, AstraZeneca, and Moderna. Although there are more hurdles to overcome before any of these vaccines are approved and, more importantly, widely available, the results buoyed the mood on Wall Street.

That was particularly true for the energy sector, which is suffering through a material supply/demand imbalance. The dislocation has been driven largely by the steep drop in demand that resulted from government efforts to slow the spread of the coronavirus by effectively shutting down vast swaths of the global economy. That pushed oil prices lower earlier in the year, including a brief moment in time when key U.S. oil benchmark West Texas Intermediate fell below zero. Although there were technical reasons for that drop, it shows how bad the situation has been in the oil patch.

So when positive vaccine news started to show up investors started to get upbeat rather quickly, pushing the shares of Exxon, Chevron, and BP higher. The obvious hope is that energy demand will increase as the world moves past the coronavirus pandemic and that will, in turn, help to rebalance the supply/demand equation, which would likely mean higher prices for oil and natural gas. Although we are still a long way from that outcome, Wall Street tends to be forward-looking and has started to price material improvement into the stocks. 

The interesting thing was the difference in the price gains among these three industry giants. Exxon, which saw the weakest advance, is facing the most difficult task in some ways. Indeed, it is trying to invest to grow its production and sustain its dividend in a weak oil price environment, two desires that require huge sums of money that it just doesn't have at its disposal right now. Investors are worried that it won't be able to achieve both ends, which could lead to a dividend cut. Capital spending, notably, has already been sharply curtailed and debt levels have increased notably so far in 2020.

At the other end of the spectrum is Chevron, which is also sticking largely to its oil focus. This energy company, however, has been benefiting from past spending and hasn't needed to add as much leverage to its balance sheet to sustain itself through this industry downturn. It is, basically, in better shape than many of its peers. Without the huge spending needs that Exxon is facing, an upturn in the energy sector would likely result in a quicker return of positive performance. 

BP, meanwhile, has charted an entirely different path, recently announcing plans to shift toward clean energy. That decision came with a dividend cut. Higher oil prices would make its efforts to shift business models that much easier since the cash-cow energy business would produce more cash flow it can use to fund the transition. 

Now what

The interesting thing about the advances here is that Exxon, Chevron, and BP all ended the month well off of their monthly highs. That suggests that there is a lot of emotion involved in the price moves, which is hardly shocking on Wall Street. However, it points out that this sector remains volatile and the path to higher oil prices is still likely to be long. Investors looking at the sector should be prepared for more ups and downs before there is a sustained improvement. As a practical matter, even after a vaccine is approved, it will likely be months or even quarters before it is widely distributed. Thus, moving past the coronavirus pandemic is still something that's in the distant future right now.

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2 FTSE 100 dividend growth stocks I’d buy today for a rising passive income

The FTSE 100 is full of stocks with the potential to create a considerable amount of wealth for shareholders. However, some of these companies are much more attractive than others. Here are two FTSE 100 dividend stocks that stand out as some of the index’s top defensive plays.

Reckitt Benckiser Group

Reckitt Benckiser (LSE: RB) has run into some problems over the past few years, and investors have been quick to turn their backs on the business. In 2016, the market was willing to pay a price-to-earnings (P/E) ratio of 29 to own Reckitt’s shares. At the time of writing, the stock is trading at P/E of only 19.9.

Despite this performance, the outlook for the owner of consumer goods brands such as Durex, Mucinex, Scholl, Strepsils and Cillit Bang is bright.

While the company’s stock might have come under pressure since 2016, earnings have remained relatively constant. Meanwhile, the top line has only increased. Therefore, fundamentally, the business is stronger today than it was three years ago, contrary to what the market would have you believe.

At the same time, Reckitt’s dividend to investors has continued to increase. The stock currently supports a dividend yield of 2.6%. The payout is covered nearly twice by earnings per share, so there’s plenty of headroom for further growth as well. As such, now could be an excellent time to snap up shares in this consumer goods giant at a discount price.

Over the long term, demand for Reckitt’s products should only grow in line with the world’s population, as the need for cleaning products and consumer healthcare products is only going to grow. This should enable the company to maintain its dividend growth track record for many years to come. Over the past six years, the company has increased its dividend at an average rate of 5% per annum.

Unilever

Unilever (LSE: ULVR) has many similar qualities. Like Reckitt, it owns some of the world’s largest consumer goods brands, the demand for which should only increase over the long run.

The company’s brands are some of the most respected and recognised in the world, such as Ben & Jerry’s ice cream. That said, not all of the group’s brands are performing to expectations. As a result, management is planning to offload underperforming businesses, such as its tea division.

The company is reportedly seeking a buyer for this business, and if its last disposal is anything to go by, management will use the proceeds to buy-back shares and fund additional acquisitions. This should only bolster Unilever’s growth case.

The shares are a bit more expensive than Reckitt’s, but not by much. The stock is currently trading at P/E of 20. On top of this, shares in the consumer goods giant support a dividend yield of 3.2%.

The payout has increased at an average rate of 8% per annum for the past decade. With more deals on the horizon, it would appear this trend can continue.

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I’d hold FTSE 100 dividend stock Vodafone

Favourite Vodafone (LSE: VOD) might finally be ready to recover. Based on the steady-as-she-goes performance of the share price since then, it would seem I wasn’t alone in thinking this.  

Notwithstanding the potential for any macro issues to upset the markets, today’s trading update leads me to think recent momentum should continue over 2020.

“Good progress”

Group revenue rose 6.8% to €11.8bn over the three months to the end of 2019 thanks to a stellar performance in what remains a “challenging” European market (up 10.1% to a little under €9bn). That said, revenue from elsewhere declined 2.7% to €2.5bn.

Based on this performance, Vodafone chose to reiterate its guidance of adjusted earnings of €14.8bn-€15bn, and free cash flow of around €5.4bn for the full year.

Away from the numbers, the company also reported making “good progress” on its strategic priorities over the period, including the appointment of a senior management team for its soon-to-be-listed towers business (European TowerCo). CEO Nick Read hinted that shares of this spin-off should hit the market in “early 2021.“

Solid ‘hold’

Vodafone’s shares were up slightly this morning, suggesting investors were satisfied with what the company had managed to achieve. Then again, most aren’t invested for capital gains — it’s the dividends they’re after.

Assuming it returns the 7.9p per share currently penciled in by analysts, Vodafone yields 5.2% at its current price — far more than the 1.3% you’d receive from even the highest-paying Cash ISA.

Taking this, today’s update, and the fact that the £40bn-cap is finally trying to tackle its serious debt burden by selling assets into account, I think the stock now looks a solid ‘hold’ for those looking to generate a second income stream from their portfolio.

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Big Tobacco’s Future Is Now

Cars and cigarettes have at least one thing in common these days: They are both being disrupted by more modern alternatives. So Stefan Bomhard, the chief executive officer of car dealer Inchcape Plc, should have some idea of what he’ll face when he takes the reins at U.K. cigarette maker Imperial Brands Plc.

It isn’t easy to find executives willing to move to the much-aligned tobacco industry. But Bomhard looks a good  CEO choice for Imperial, which sells Lambert & Butler cigarettes and Blu vapes. The company had decided to part ways with Alison Cooper in October, a week after a profit warning. She will now step down as with immediate effect.

Bomhard did a solid job at Inchcape. While the shares are down about 18% since he became CEO in April 2015, underperforming the FTSE All-Share Index, conditions in car dealing haven’t been easy since Britain voted to leave the European Union and consumer confidence crumbled. It’s still a much better performance than the FTSE All-Share General Retailers Index.

The downside is that Bomhard doesn’t have any tobacco experience. But this is less of an issue than it would be in, say, general retailing. Imperial will have plenty of executives with many years’ worth of knowledge of the traditional cigarette business, still the biggest and most profitable part of the group. And he should be able to pull on his prior experience with big global brands in the race to grab market share for Imperial’s new products, whatever they may be.

The new chief executive spent his career in consumer goods before joining Inchcape, with roles at spirits company Bicardi, chocolate and candy maker Cadbury, and consumer-goods giant Unilever. That should put him in good stead as Imperial attempts to pivot to alternatives to traditional cigarettes, which could in turn, pave the way for it to diversify into dispensing other adult, highly regulated products, such as cannabis.

When Bomhard takes up the role at a yet to be determined date, his first task will be to get to grips with the crisis in the U.S. vaping industry. The company is evaluating the impact of the recent Food and Drug Administration ban on flavors aside from menthol and tobacco for pod-based electronic cigarettes, the type it makes.

Then Bomhard will have to work quickly to decide where best to focus Imperial’s attention, and investment. Although the group has strong positions in vaping and oral nicotine, it only entered the heat-not-burn market relatively recently. He must decide whether to expand in this category, which has not been drawn into the crisis in the U.S. vaping industry.

He could also look at reshaping other aspects of Imperial’s business, including traditional cigarettes. The company is already seeking to raise up to 2 billion pounds ($2.6 billion) through disposals, including a sale of its premium cigar business. But he could go further, say selling off parts of the portfolio in Asia and Africa, and returning the proceeds to shareholders, or investing more in tobacco alternatives.

Either way, Bomhard must take decisive action. Shares in Imperial have fallen more than 20% over the past year, and they trade at a 40% discount to Bloomberg Intelligence’s global tobacco manufacturing valuation peer group. The company even lags Altria Group Inc., which is reeling from its disastrous investment in vaping company Juul Labs Inc.

Imperial has long been seen as an acquisition target, with Japan Tobacco Inc. tipped as the most obvious contender. Another possibility would be for Japan Tobacco and British American Tobacco Plc to carve up Imperial’s empire between them along geographical lines. So if Bomhard doesn’t light up the Imperial share price, a bigger rival just might.

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