High dividend yields are back in vogue. FTSE 100 companies are reinstating dividends or increasing them. The best part is that some of these still classify as cheap UK shares.
In other words, I can earn a dividend income from reasonably priced stocks!
By reasonably priced, I mean having a price-to-earnings (P/E) ratio below that of the FTSE 100 index. As per data provider, Siblis Research, that number was 17.5 times at the start of 2021.
#1. M&G: a high dividend yield that cannot be ignored
The first is investment manager M&G, which became an independent entity after its split from insurance giant Prudential in 2019. It has the biggest dividend yield, of 8.5%, among FTSE 100 stocks and it also has a really low earnings ratio of 5 times. It also posted weak results recently and runs performance risk too.
#2. British American Tobacco: long-term risks
Tobacco biggie British American Tobacco has the next highest dividend yield of 8.3% and an earnings ratio of 9 times. Unlike M&G it saw rising profits recently. But the long-term strategic risk to this passive income generator just cannot be ignored.
#3. Phoenix Group Holdings: streamlining underway
Phoenix Group Holdings, the insurance provider with a high dividend yield of 6.5%, also classifies as a cheap UK share with a P/E of 8 times. Its recent streamlining of the strategic partnership with Standard Life Aberdeen can help its business going forward. I am wary of its erratic past performance though.
#4. GlaxoSmithKline: consistent growth
The pharmaceuticals and healthcare biggie GlaxoSmithKline (GSK) is another cheap UK share to note. Its earnings ratio is higher than some at 11 times, but its dividend yield is strong at 6.4% and it has shown itself to be a consistently growing company. Its falling share price since the start of last year is a downer though because that can negate passive income gains.
#5. Polymetal International: out of favour
The precious metals’ miner Polymetal International has a similar dividend yield to GSK but it has a far lower earnings ratio of 6.5 times. But precious metals are out of favour with investors after being in the spotlight last year. The risk here is that the trend can continue to fall as macro-trends dominate the investor mindset, possibly eroding the value of my capital even as I earn dividends.
#6. Legal & General: Covid-19 impacted
The general insurer Legal & General, with a dividend yield of 6.2% comes next. Its earnings ratio is a bit higher than that of others at 14 times, which can take away from its overall attractiveness. Als0, its full-year 2020 results released earlier today also show some pandemic hit, though I reckon 2021 can be better for insurers as the economy reopens.
In sum, the fact is that there are both risks and risks to stock market investments. But I think looking at both the pros and cons helps me make the best calculated risks in my goal to earn a high dividend yield. And these cheap UK shares offer a good way to do so.
