3 cheap shares I bought for high yields

These three cheap shares offer some of the top dividend yields in the London market. Also, all three firms are household names and leaders in their fields.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As a veteran investor with over 35 years’ experience of buying shares, I frequently scan the FTSE 100 and FTSE 250 indices for cheap shares. In a recent stock screen, I found more than 20 Footsie shares paying high yields (for me, defined as at least 5% a year).

Shares I own for juicy dividends

Since mid-2022, my wife and I have been building a new share portfolio. Our main goal with this new asset is to generate high levels of income. We can then use this extra cash to help pay our soaring bills, or reinvest in more shares.

So far, we’ve bought 17 new stocks, with at least three more purchases to come. Meanwhile, here are three cheap ones we bought for their excellent dividend-generating properties:

CompanyLegal & GeneralRio TintoVodafone
BusinessFinancial servicesMiningTelecoms
Share price260.8p6,291p93.42p
52-week high295.7p6,406p141.6p
52-week low201.4p4,424.5p83.24p
12-month change-10.0%+13.0%-25.9%
Market value£15.6bn£105.7bn£25.4bn
Price-to-earnings ratio7.77.214.6
Earnings yield13.0%13.9%6.8%
Dividend yield7.2%8.3%8.4%
Dividend cover1.81.70.8

These three come from very different corporate worlds. Legal & General Group is one of the UK’s leading providers of life assurance, savings and investments. Anglo-Australian miner Rio Tinto is one of the globe’s biggest producers of aluminium, copper, iron ore and zinc. And telecoms giant Vodafone is a world-leading provider of mobile and broadband services.

When building a portfolio, this stock diversification — spreading money across widely differing companies and sectors — is a very good thing. It helps to prevent concentration risk and avoids having too many eggs in similar baskets.

These three shares offer market-beating cash yields

The next thing I’d say is that all three have low or modest price-to-earnings ratios and high earnings yields. For me, this is the definition of a ‘cheap’ share — one with an earnings yield that beats the market average. Legal & General and Rio Tinto have earnings yields of 13% and nearly 14% respectively — roughly double the FTSE 100’s under 7%.

But what drew us to buy these stocks for our family portfolio is their market-beating dividend yields. The highest (8.4% a year) comes from Vodafone, whose share price has crashed more than a quarter over the past 12 months. However, this cash yield is covered only 0.8 times by earnings, making it the least solid of this trio’s payouts.

Conversely, at Rio Tinto, the dividend yield of 8.3% — over twice the FTSE 100’s cash yield — is covered 1.7 times by earnings. Although history has taught me that mining dividends can be very volatile, I’m currently confident in Rio’s 2023 payout. Then again, Rio last cancelled its dividend in 2016. Oops.

Lastly, L&G’s cash yield of 7.2% a year has the highest dividend cover, at 1.8 times. I consider this payment to be rock-solid — barring another market meltdown, that is. Indeed, I’m looking forward to owning this share for many years for its income-generating ability.

In summary, we bought these three cheap shares after their prices fell steeply. And now we intend to hold them for passive income for many years — or perhaps until their dividends get cut!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliff D’Arcy has an economic interest in Legal & General Group, Rio Tinto, and Vodafone shares. The Motley Fool UK has recommended Vodafone Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »