I’ve been investing in shares since 1986/87, when I turned 18. Over the past 35 years, I’ve made just about every investing mistake possible, yet lived to tell the tale. After such long experience, I’ve stuck to my favourite strategy for a very long time. My #1 investing approach today is to buy cheap shares offering high dividend yields.
Why I love juicy dividend yields
Dividends are regular cash payments made to shareholders by companies, usually half-yearly or quarterly. But most UK-listed companies don’t pay dividends, so I tend to concentrate my search for high yields in the FTSE 100 index. Also, dividends are not guaranteed and can be cut or cancelled at any time.
Another reason I like buying and owning dividend-paying shares is that once I have this cash, I can do what I like with it. I can reinvest it by buying more shares, spend it, or put it away for a rainy day. And that’s why, like American tycoon John D Rockefeller, I love to “see my dividends coming in”.
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Three cheap, high-yielding shares
In my latest screen of the FTSE 100, I found 12 shares with dividend yields of at least 7% a year. But some of these high yields are not covered by past or current earnings. So then I took the six highest-yielding Footsie stocks and removed three where earnings didn’t cover dividends by at least 1.2 times. Following this filter, I ended up with these three cheap shares:
| Company | Share price | P/E* | Earnings yield | Dividend yield | Dividend cover |
| Rio Tinto | 5,537.8p | 5.3 | 19.0% | 10.4% | 1.8 |
| Imperial Brands | 1,775.9p | 8.3 | 12.0% | 9.0% | 1.3 |
| Abrdn | 169.3p | 3.7 | 27.2% | 8.6% | 3.2 |
For the record, Rio Tinto is a £95.4bn heavyweight mega-miner, while Imperial Brands is one of the world’s largest cigarette manufacturers. And Abrdn (formerly Aberdeen) is an Edinburgh-based asset manager. Thus, these three stocks are from very different sectors, which helps with diversification (spreading risk around).
What also attracts me to these three stocks is their market-beating earnings yields, ranging from 12% to over 27%. These high earnings translate into dividend yields of 8.6% to 10.4% a year. Across all three shares, the average dividend yield exceeds 9.3% a year. That’s about 2.4 times the cash yield of the wider FTSE 100. Nice.
I’d buy all three stocks today
I don’t own any of these three cash-generating stocks, but I’d gladly buy all three shares today. For me, they offer high levels of passive income, backed by solid earnings. But there’s a lot going on for me to worry about at the moment. My worries include soaring inflation (especially energy prices), rising interest rates, slowing UK growth, and growing fears of another recession. Nevertheless, I see most of these concerns reflected in these share prices. Hence, I’d still buy and hold these three cheap shares today!
