Have £3k to invest? Here’s a FTSE 100 income leader I think you should buy

Coworkers standing near a wall
Coworkers standing near a wall

If you have just £3,000 to invest and want to make the most of your money, I highly recommend you split these funds and invest 50% in mining behemoth BHP Billiton(LSE: BHP) and the rest in telecoms business Manx Telecom(LSE: MANX).

These companies should give you an instantly diversified dividend portfolio that should generate a steady income whatever the weather.

Steady income

BHP has transformed itself over the past few years from a struggling, inefficient mining group to what I believe is one of the best income stocks in the FTSE 100.

The group has aggressively cut costs, which has pushed profit margins higher, and a tight control on commissioning of new projects means that the business is no longer wasting shareholder capital on expensive, inefficient projects.

These efforts are now really starting to pay off. For the year ending June 30, the company reported free cash flow of $12.5bn, which allowed management to pay a record final dividend.

It looks as if the company will repeat this performance in 2019. Management is expecting to achieve additional productivity savings of $1bn in 2019, freeing up more capital to return to investors. The business is planning to increase the amount it spends on capital projects during 2019 and 2020 by around $1.2bn per annum, having paid down more than $15bn in debt over the past two years. But BHP has, in my opinion, plenty of flexibility to both increase capital spending and hike cash returns to investors.

With this being the case, it is no surprise that City analysts have pencilled in a dividend yield of 8.6% for 2019

Put simply, with its global operations, strong balance sheet and cash generation, BHP is an excellent dividend investment. Manx shares many of these attractive qualities.

Monopoly business

As the largest telecoms provider on the Isle of Man, it has a large, captive customer base, which translates into impressive profit margins. For 2017, the company reported an operating profit margin of 17% and a free cash flow of £11m. I expect the group to unveil a similar performance for 2018. Manx’s end-of-year trading update, which was published today, confirms that the firm will meet City expectations for 2018.

Looking at the update, I reckon the company will report yet another year of strong cash generation and progress towards its key goals of diversifying outside the Isle of Man and improving its offering for existing customers, primarily through the rollout of fibre infrastructure.

City analysts think the company will pay out 12p per share for fiscal 2018, rising to 12.6p for 2019. At the current share price, this translates into a dividend yield of 7.8% for 2018 and 8.1% for 2019. On top of the 7.8% yield, the shares are changing hands at a relatively undemanding valuation of just 11.6 times forward earnings.

In my opinion, this undervalues the group’s bright prospects and cash generative business. As long as Manx maintains its leading position in its key Isle of Man market, I think this company can continue to produce steady income returns for investors for many years to come.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Manx Telecom. 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.