Lately, my wife and I have been buying cheap UK shares. Why? Before Russia’s invasion of Ukraine, the London market was riding high. But then it plunged, rebounded and slid again in the summer lull. While the FTSE 100 is up 5% over one year, the FTSE 250 has lost 15.1% in 12 months. Hence, we recently bought these three cheap FTSE 250 shares for their market-beating dividends.
A FTSE 250 share
Direct Line Insurance Group, a leading provider of motor insurance, has branched out into selling business, life, pet, and travel insurance too. As well as Direct Line with its familiar red telephone, the group operates brands including Churchill, Green Flag, NIG, and Privilege. But red-hot inflation and regulatory changes to insurance premiums are harming Direct Line’s profits. Here’s how this FTSE 350 share has performed:
| Five days | 0.6% |
| One month | -13.7% |
| Six months | -31.9% |
| 2022 YTD | -25.1% |
| One year | -33.1% |
| Five years | -47.2% |
This stock has lost a third of its value in 12 months. Here are Direct Line’s fundamentals following these falls:
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| Share price | 209.2p |
| 52-week high | 318.8p |
| 52-week low | 184.55p |
| Market value | £2.7bn |
| Price/earnings ratio | 10.4 |
| Earnings yield | 9.6% |
| Dividend yield | 10.9% |
| Dividend cover | 0.9 |
Even though its near-11% dividend yield isn’t fully covered by earnings, I expect Direct Line to rebound in 2023-24. Thus, we bought this FTSE 250 stock to add dividends to our passive income.
Dividend share
ITV (LSE: ITV) is the UK’s leading commercial terrestrial broadcaster and a leading producer of TV programmes and other media. Indeed, it creates, produces and distributes content around the globe. But weaker results have hit its share price hard, as shown below:
| Five days | 1.5% |
| One month | 10.9% |
| Six months | -39.9% |
| 2022 YTD | -35.0% |
| One year | -37.6% |
| Five years | -57.5% |
With this FTSE 250 stock down almost two-fifths in the past half-year, ITV’s share fundamentals look very undemanding to me, as below:
| Share price | 71.92p |
| 52-week high | 127.19p |
| 52-week low | 62.04p |
| Market value | £2.9bn |
| Price/earnings ratio | 6.1 |
| Earnings yield | 16.3% |
| Dividend yield | 7.0% |
| Dividend cover | 2.3 |
To me, ITV looks like a classic value stock, offering a 7% cash yield, covered more than twice by earnings. But rising inflation, higher interest rates and a slowing economy may hit UK company earnings in 2022-23. Even so, I still think ITV might be a bargain buy.
And income stock
Royal Mail (LSE: RMG) provides the UK’s universal postal service. However, this division is currently loss-making, so most of Royal Mail’s earnings come from GLS, its highly profitable Amsterdam-based overseas division. Also, Royal Mail workers who are members of the Communication Workers Union have voted to strike over pay and conditions. As a result, this share has slumped, as follows:
| Five days | -2.2% |
| One month | 1.8% |
| Six months | -38.7% |
| 2022 YTD | -45.7% |
| One year | -44.2% |
| Five years | -31.0% |
Having crashed by almost half in 2022, Royal Mail shares now seem lowly rated to me, based on these modest fundamentals:
| Share price | 274.88p |
| 52-week high | 531.4p |
| 52-week low | 257.43p |
| Market value | £2.6bn |
| Price/earnings ratio | 4.5 |
| Earnings yield | 22.3% |
| Dividend yield | 6.1% |
| Dividend cover | 3.7 |
While things don’t look good for Royal Mail presently, its juicy dividend is very well-covered. And so we bought this cheap FTSE 250 stock as a long-term hold!
