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I’d buy these 2 cheap stocks in a £20k ISA to generate a £1,000 annual income

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The FTSE 100 has slipped since hitting its all-time high of 8,000 and I can see plenty of cheap stocks on the index today. The following two quickly caught my attention and I’m currently considering them.

If I split the £20,000 I’m allowed to invest in a Stocks and Shares ISA annually between them, and generated an average yield of 5%, that would give me dividend income of £1,000 a year.

Income stocks at nice valuations

Anglo American (LSE: AAL) would give me diversified exposure to commodity prices, which I expect to rise once interest rates ease and the world puts the pandemic and recession behind it.

It produces a spread of commodities, including diamonds, copper, platinum, iron ore, thermal coal and nickel, with mining and exploration projects in Africa, the Americas, Asia, Australia, and Europe. Plus it owns diamond company De Beers.

Anglo American skipped the recent FTSE 100 surge, which suits me. I prefer to buy stocks when they’re out of favour, rather than flying high. This boosts my chance of getting a bargain, and reduces the risk of overpaying. The stock is actually down 23.32% over the last 12 months. Over the last three months, when the index as a whole has flown, it’s down 7.84%.

It looks cheap to me, trading at just 7.3 times earnings. Naturally, there are reasons for this underperformance. Last month, Anglo American posted a 30% drop in underlying EBITDA earnings to $14.5bn (although last year’s comparative number was a record high).

Management put this down to “inflationary headwinds and higher energy prices combined with lower production volumes”. Extreme weather didn’t help. These sound like short-term problems to me. I buy stocks with a 10-year plus view, which gives Anglo American plenty of time to bounce back.

With a forecast yield is 5.8%, covered 2.4 times by earnings, now looks like a good entry point to buy this FTSE 100 Dividend Aristocrat.

This stock looks good on paper

FTSE 100-listed paper and packaging group Mondi (LSE: MNDI) has also had a tough time lately, as the global downturn hits e-commerce and there’s less demand for its cardboard. Its share price is down 7.94% over three months, and 1.56% over one year.

Again, recent disappointing performance looks like an opportunity for a bargain hunter like me.

Mondi has been squeezed by falling demand and higher paper prices. Yet it delivered a surprisingly strong performance in 2022, with underlying EBITDA up 60% to €1.848m.

Management warned that “significant geopolitical and macro-economic uncertainties remain” in 2023, but as I said, my timescale is much longer than that. One positive is that input costs are starting to decline. Another is that Mondi combines healthy cash generation and a strong balance sheet, with a market-leading position. The risk is that online shopping falls out of favour, yet I can’t see that happening yet.

Mondi yields 4.4% covered 2.8 times by earnings. These two stocks combined would give me an average yield of 5.1%, thus hitting my target of £1,000 income from a £20k stake.

Of course, dividends are not guaranteed, but Mondi is expected to yield more next year at 5.3%. Both companies are now under serious consideration for this year’s ISA.

The post I’d buy these 2 cheap stocks in a £20k ISA to generate a £1,000 annual income appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. 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.

Motley Fool UK 2023