One dirt cheap FTSE share I’d buy for passive income in July and it’s not Lloyds or GSK
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Following the recent decline, I've noticed numerous FTSE 100 stocks that catch my interest as potential sources of passive income for my retirement. If I possess sufficient funds, I would eagerly seize the opportunity in July to purchase these stocks at their current reduced prices.
I'm strongly inclined to increase my investment in Lloyds Banking Group. It appears extremely undervalued, trading at approximately 42p per share. In the past few months, my threshold for making a purchase has been at 45p. Lloyds is transforming into the dividend generator it used to be, with an estimated yield of 6.6%, comfortably covered 2.7 times by earnings.
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If house prices plummet, there is a possibility that debt impairments will increase. However, if the base rates go up, the bank's net interest margins will see a positive impact. Additionally, since I am planning to hold on to my investment for at least 10 years, I have sufficient time to deal with the current uncertainties. The only obstacle in my way is that I have a larger stake in this particular FTSE 100 stock compared to any other.
I want to enter the healthcare industry by acquiring GSK, but the current dividend yield of 3.14% doesn't excite me. Additionally, considering the considerable drop of 22.34% in its shares over the past year, I would anticipate a lower valuation of 10.1 times earnings. Although I believe GSK will eventually improve, I believe there are currently more valuable opportunities available.
This leads me to the FTSE 100 stock that I am eager to purchase, multinational mining company Rio Tinto (LSE: RIO). I currently hold a small portion of the £81 billion corporation and I am interested in acquiring more. Presently, it seems like an opportune moment to make my move.
I dislike purchasing a stock after it has experienced a significant increase in value because there is a possibility of paying too much and joining the party at a late stage. However, this is not a concern with Rio Tinto's stock as it has declined by 13.58% over the last six months and is currently at a similar level to where it was a year ago.
Rio Tinto has experienced a setback due to China's re-emergence after the Covid pandemic. Initially, it was expected that China's recovery would greatly benefit Rio Tinto as it is their largest customer. However, after a promising start to the year, China's economic growth has slowed down. This can be attributed to various factors such as a struggling property market, a decline in industrial production, and reduced worldwide demand for Chinese exports.
JP Morgan recently reduced its predictions for China's economic growth in 2023 from 5.9% to 5.5%, which inevitably has an impact on Rio Tinto. However, there is some positive news as the Chinese government is planning to implement measures to stimulate the economy. Unfortunately, this comes at the same time when the United States and Europe are teetering on the edge of a recession.
The management team of Rio must also confront the task of achieving net zero emissions. They have decided to allocate a substantial amount of $1.1 billion towards a low-carbon aluminum smelting technology. It is likely that they will encounter additional financial requests similar to this one, despite the possibility of receiving grants.
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It may seem like I am expressing doubts about the stock, but these obstacles are only temporary and my investment goals are focused on the future. Rio Tinto's shares are currently being traded at a very favorable price of only 7.7 times earnings. This appears to be an excellent opportunity to enter the market.
Even more advantageous is the fact that the stock is projected to generate a return of 7.4%. This return is safely secured as the earnings cover it 1.7 times. This is even after the company reduced its dividend by 50% back in February. I currently do not have much involvement in the metals and mineral sector overall, and specifically Rio Tinto. However, I plan to rectify this in July.
The article A highly affordable FTSE stock that I would purchase for effortless earnings in July, and it's not Lloyds or GSK, was first published on The Motley Fool UK.
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Harvey Jones holds investments in Lloyds Banking Group Plc and Rio Tinto Group. The Motley Fool UK has suggested GSK and Lloyds Banking Group Plc. The opinions mentioned in this article are those of the author and may not align with the official advice provided in our subscription services like Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking into account various perspectives improves our abilities as investors.
The blog section of Motley Fool UK in the year 2023
