The FTSE 100 index has recovered a fair bit from the stock market correction that happened in the last week of February. In fact, as I write it is trading north of 7,400. If all goes well, it could be a matter of days before it makes a full recovery. But for now, more than one FTSE 100 dividend stock is trading at a discount and looking quite cheap. This makes it a great time for me to buy them today to earn a passive income.
What are cheap FTSE 100 dividend stocks?
Before I get into the stocks, let me first define what I mean by cheap here. All stocks that have a market valuation lower than that for the FTSE 100 index as a whole, despite good prospects, are cheap in my opinion. It is a simple concept, but one that works, in my observation.
Next, dividend stocks have been defined in a specific way here. Many FTSE 100 stocks pay dividends. But dividend yields for a number of them are so low that I cannot hope to make any substantial passive income from them. At least not in the foreseeable future. So, the dividend stocks considered here are only those that have a dividend yield higher than that for the FTSE 100 as a whole, which is at 3.7% right now.
BP rides the oil price wave
The first FTSE 100 cheap dividend stock I like is BP, the oil giant. At around 12 times, its price-to-earnings (P/E) ratio is somewhat lower than that for the FTSE 100 index at 15 times. Moreover, going by high oil prices, its prospects look good too. It also has a dividend yield of 4.4%. Of course rising oil prices themselves can derail the economy, which is not good even for BP, but for now it does not look like an imminent challenge. I have already bought BP and would buy more of it in the near future.
SSE is a clean energy biggie
For those of us who would like to balance out investments in polluting industries like oil with clean energy ones, the answer is SSE. The power utility is the UK’s biggest producer of renewable energy. It has an even lower P/E of around 6.5 times at present, and a bigger dividend yield than BP’s of 4.9%. Its long-term prospects look good too, going by the shift towards green energy. Though, as a shareholder in the stock for the past few months, I have made limited gains. Its share price has been quite sluggish. I believe this is a short-term phenomenon, however. I could buy more now.
Royal Mail’s promising as e-commerce stays strong
Finally, I like Royal Mail. The letters and parcels delivery services provider is the cheapest of the three stocks, with a P/E of only 4.5 times. And it has a dividend yield of 4.6%. It has faced some problems recently, like delayed deliveries during the holiday season. With a recent rise in coronavirus related hospital admissions, it could face more such obstacles. But, I think over the long-term its prospects look great, going by the fast shift towards digital shopping seen during the pandemic. I hold it in my portfolio already, and could buy more when it is still down.
Manika Premsingh owns BP, Royal Mail, and SSE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.