As a veteran value investor, I’m always hunting for cheap shares that offer market-beating dividend yields. My goal is to buy and hold these undervalued stocks for the long term, boosting my passive income. Here are two candidates that are firmly on my buy list for August.
Passive income powerhouse #1: M&G
M&G (LSE: MNG) is one of the UK’s leading asset managers. Founded in 1931, it has grown to manage £342bn at end-2022 for 5m retail customers and over 800 institutional clients.
However, M&G’s share price has marked time for almost two years, being unchanged since early November 2021. That follows its profits being wiped out in 2022, due to steep falls in global bond prices and stock markets last year.
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With financial assets bouncing back in 2023, M&G will return to profit this year. As I write, the stock trades at 193.15p, valuing the group at nearly £4.6bn. The share price is down 9.8% over one year and 14.2% over five years (excluding dividends).
Thanks to these price falls, M&G shares offer a mouth-watering dividend yield nearing 10.2% a year — one of the highest in the FTSE 350 index. Usually, double-digit cash yields flash warning signs to me, but I see this payout as relatively safe for now.
I don’t own M&G shares yet and, although I’m worried that US stocks may be entering bubble territory, I intend to add them to my family portfolio this month.
Dividend stock #2: Glencore
Now for a completely different kind of business. Global miner and commodity-trading company Glencore (LSE: GLEN) stock is another I don’t own, but plan to buy in August.
Glencore operates in a messy market, digging up and selling various valuable commodities around the world. Hence, many ESG (environmental, social, and governance) investors choose to shun its shares. Yet I am attracted to Glencore stock for the same reason I’m drawn to M&G — its ability to generate long-term passive income for my family.
As I write, the Glencore share price stands at 460.6p, valuing this mining giant at £57.1bn and making it a FTSE 100 powerhouse. Despite commodity prices falling in 2023, the stock is up 2.7% over one year and a tidy 44.8% over five years.
Then again, the shares have fallen by a sixth (-16.6%) this calendar year, sending them firmly into my value zone. Currently, the stock trades on a multiple of 4.5 times earnings, for a bumper earnings yield of 22.3%.
Also, the stock’s hefty dividend yield of 7.9% a year is covered 2.8 times by earnings, offering a decent margin of safety. But I fully expect Glencore’s earnings to fall this year, testing this coverage ratio. It’s worth noting that the firm cut its dividends in 2015, 2016, and 2020.
Summing up, with the average cash yield across both stocks exceeding 9% a year, I look forwarding to owning these two stocks for their powerful passive income!
