I’m always on the lookout for cheap UK dividend shares to add to my portfolio. Not only do these investments provide a level of income, but if they’re cheap enough, they could also provide capital growth.
However, I’m also aware picking individual stocks can be a challenging strategy. Therefore, I like to own a basket of income shares. I believe the additional diversification will limit any impact on my portfolio if one or two investments turn sour.
After all, dividends are paid out of company profits. So they can be cut at a moment’s notice. As such, I believe dividend income shouldn’t be taken for granted.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
It also means I can combine lower-yielding stocks with high-yielding investments to increase my overall income level.
Cheap UK dividend shares
Two of the most attractive income stocks on the market at the moment, in my opinion, are the insurance and financial services providers Legal & General and Aviva.
The former offers a dividend yield of 6.4% and trades at a price-to-earnings (P/E) ratio of 12.5. Meanwhile, Aviva trades at a P/E ratio of 7.4 and yields 6.8%.
I’d buy both of these companies, but they might not be suitable for all investors. Both firms are complex financial services businesses, which some investors may find difficult to understand. I think this is why both stocks are trading at relatively low valuations and offer market-beating dividend yields.
As well as these blue-chip financial services companies, I’d also buy homebuilder Persimmon. This stock is slightly more expensive, as it’s selling at a P/E ratio of 13.2. However, its dividend yield of 8.2% is more than double the market average.
As the UK housing market continues to boom, I think the homebuilder’s sales and profits should continue to expand. This growth should support the company’s lofty dividend yield. That said, if the market starts to slow, management could cut the distribution.
Uncertainty prevails
Many cheap UK dividend shares trade at low valuations because they’ve uncertain outlooks. That seems to be the case with financial services provider Plus500. The investment broker currently trades at a P/E ratio of 4.2 and offers a dividend yield of 7.9%.
These metrics look incredibly attractive, but the group benefited from a surge in activity on its platforms last year as bored consumers started playing the markets. The company itself has warned this growth may not last. It seems to me investors have begun avoiding the business ahead of a slowdown.
Nevertheless, I’d buy the stock for its income potential.
Finally, I’d buy the Secure Income REIT for my portfolio of cheap UK dividend shares. This real estate investment trust is currently trading at a discount of 18% to the value of its property portfolio. On top of this, the stock offers a dividend yield of 2.8%.
Investors have sold the shares due to concerns about the company’s rent collection and property values. I think these concerns are overblown. That’s why I think there’s an opportunity to buy this investment at a knock-down price.
