As a value investor for 35 years, I’m always searching for cheap and unloved shares. And when Mr Market has his occasional meltdowns, I see these as good opportunities to find beaten-down stocks. Right now, I see deep value in the FTSE 100 index — one of the best-performing stock indexes in 2022.
What do I mean by cheap shares?
When I say cheap shares, what I mean is the stocks of good-quality, established companies with easily understandable business models. To be honest, I don’t mind paying premium prices to invest in great businesses. But for extra margin of safety, I prefer to buy shares trading on low price-to-earnings ratios and high earnings that offer market-beating dividend yields. This is my classic approach to finding cheap/value shares.
I like big FTSE 100 dividends
One thing that really attracts me to cheap shares is high dividend yields. Right now, the FTSE 100 index offers a cash yield of under 4% a year. So dividends well in excess of this market benchmark often turn my head.
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For example, in a quick screen of the FTSE 100, I found more than 10 shares offering dividend yields above 6% a year. That’s over 1.5 times the cash yield of the wider index. And as an old-school investor, I know that dividends can account for up to half the long-term returns from UK shares. Thus, I’m always keen to add more dividend-paying dynamos to my family portfolio.
Four high-yielding shares I’d buy today
Here are four high-yielding cheap shares from the FTSE 100 that I spotted today (sorted from highest to lowest dividend yield):
| Company | Sector | Share price | 12-month change | Market value | P/E* | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Housebuilding | 2,173.0p | -32.9% | £6.9bn | 8.8 | 11.3% | 10.8% | 1.0 |
| Rio Tinto | Mining | 5,838.0p | -7.4% | £97.1bn | 5.7 | 17.6% | 9.9% | 1.8 |
| Imperial Brands | Tobacco | 1,786.5p | 11.9% | £16.9bn | 8.4 | 11.9% | 9.0% | 1.3 |
| M&G | Financial | 217.0p | -12.7% | £5.6bn | 67.3 | 1.5% | 8.4% | 0.2 |
As you can see, these four shares have had a mixed 12 months. The best performer among these cheap shares is tobacco manufacturer Imperial Brands, whose stock is up nearly 12% in the past year. The worst-performing is housebuilder Persimmon, whose stock has crashed by nearly a third in a year.
Though all four are FTSE 100 firms, their market values range widely, from under £6bn at asset manager M&G to over £97bn at mining heavyweight Rio Tinto. But what really draws me to these four is their bumper dividend yields. The highest is nearly 11% a year, while the lowest is over 8% a year. The average cash yield across all four shares is a market-thrashing 9.5% a year. I like the look of that.
Sometimes, shares are cheap for a reason
Then again, past experience has taught me that very high dividend yields — say, above 10% a year — may indicate company problems. For example, when share prices slump, dividend yields soar in tandem. Thus, some shares with ultra-high dividend yields may turn into capital-destroying ‘value traps’.
To sum up, despite my worries about red-hot inflation, rising interest rates, Russia/Ukraine, Chinese growth, and Covid-19, I’m still committed to buying cheap shares. That’s why I’d buy and hold these four FTSE 100 stocks today!
