Scouring the FTSE 100 for bargain-priced dividend shares is a bit like shooting ducks in a barrel right now. They’re bobbing up everywhere, fat, juicy and tempting, and the only question bothering me is which to bag first.
I’ve never actually shot ducks in a barrel, or anywhere else, but I have been gunning for dirt cheap FTSE 100 shares lately. I began my hunt last October, picking off housebuilder Persimmon and mining giant Rio Tinto, then added Lloyds Banking Group and asset manager M&G to my haul in November. At which point, I ran out of money.
Setting my sights on those yields
Luckily, I’ve just completed a transfer of several legacy pensions into a shiny new self invested personal pension (SIPP), so I’ve got more ammunition today.
My first target was Legal & General Group, which I couldn’t resist. It was trading at around seven times earnings at the time, and yielding more than 8%. I quickly bought more shares in Lloyds when its share price dipped back below 45p, because I didn’t buy enough the first time.
Now I’m looking for my next purchases. I’m feeling spoiled for choice, with housebuilder Barratt Developments yielding 7.82% and trading at 5.7 times earnings, while rival Taylor Wimpey yields 8.05% and is scarcely more expensive at 6.2 times earnings.
I personally don’t buy tobacco stocks but if I did I would be all over British American Tobacco and Imperial Brands. Both look really, really cheap trading at 6.9 times earnings and 6.5 times earnings, while yielding an incredible 8.42% and 8.17%, respectively. Insurer Phoenix Group Holdings yields even more at 9.61%.
I’m not kidding myself here. I know better than most that an ultra-high yield may be also be fragile. Shortly after I bought Persimmon, which was yielding a ridiculous 20% at the time, management slashed its shareholder payout by three quarters, while Rio Tinto has halved its dividend.
Both still deliver a pretty solid level of income though, and their share prices are up since I bought them, so I’m happy. But dividends at Phoenix, M&G and Vodafone Group, which now yields 9.86%, all look vulnerable to me.
I understand the risks too
Another risk is that the UK economy isn’t exactly booming right now. The housebuilders look vulnerable to the slowing property market, for example, while L&G and M&G could do with a good old-fashioned stock market rally to boost assets under management and customer inflows. Despite the US bull run, we’re not there yet.
I’m not buying these stocks looking for a short-term gain. I plan to hold my purchases for years and years, and with luck several decades. That should give them time to recoup any lost value, and for my reinvested dividends to compound and grow. Again, there are no guarantees, even big solid blue-chips can lose their way. That’s why I plan to buy at least a dozen different dividend stocks, for diversification.
The global economy is riddled with uncertainties right now, but history shows this is often the best time to invest. I’m taking what could turn out to be once-in-a-lifetime opportunity to pick up my favourite shares at a reduced prices, and with amazing yields. I’ve got my ducks in a row, now I just need to pull the trigger.
