While researching the best cheap shares in the UK market, I uncovered three FTSE 100 companies with a good track record of paying dividends. They are Vodafone (LSE:VOD), Glencore (LSE:GLEN), and Legal & General (LSE:LGEN).
Vodafone
At 67p each, I can buy lots of Vodafone shares without spending too much. What’s more, the mobile telecommunications company has one of the highest dividend yields on the FTSE 100, at 11.5%.
But I can’t look at the yield alone – several other factors affect Vodafone’s performance.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Consensus among analysts predicts an average decline of 56% for Vodafone’s earnings per share (EPS) growth rate. This could significantly offset any profits I make from dividend shares by decreasing the value of my investment. Couple that with a low dividend payout ratio of 23% and Vodafone doesn’t appear very attractive.
But it’s got a wild card!
Today (16 January), Vodafone and Microsoft signed a 10-year partnership for the provision of AI and cloud services to 300m clients. The $1.5bn deal will improve Vodafone’s customer services while providing Microsoft exposure to the company’s IoT and financial services. With its share price down 28% over the past year, I believe this deal is just what Vodafone needs to turn its fortunes around.
By my calculations, if I buy 5,000 Vodafone shares today and reinvest my dividends, I could accrue £2,840 of profit over five years.
Glencore
With a £54bn market cap, Glencore is in the top 10 largest companies on the FTSE 100. The commodity trading and mining company enjoyed consistent growth over the past five years, with shares up almost 50%. Coupled with a low price-to-earnings (P/E) ratio of seven times, Glencore looks like a solid investment to me.
But it’s not all roses on the mineral mine.
Glencore’s future prospects are less positive. Its profit margins of 4.3% are a third lower than last year, with both revenue and earnings forecast to decline in the coming years. Despite this, the consensus among analysts estimate Glencore shares to be undervalued by more than 50%.
At £4.48, they aren’t particularly cheap but benefit from a 9.1% dividend yield and an impressive 57% payout ratio. While the share price has decreased 20% over the past year, analysts predict an average one-year price target of £6.32.
Using this data, I’ve calculated that reinvested dividend payments on 500 shares over the next five years could accrue me £2,500 in profit.
Legal & General
Legal & General has the lowest dividend yield on this list, at only 7.8% with a 58% payout ratio. However, I think it’s probably the most reliable in regards to dividend payments. Over the past 10 years, dividend payments have increased and paid out consistently. This is a critical metric to track, as a high dividend yield is meaningless if it seldom gets paid.
At £2.51, the LGEN share price is down 2% over the past year. It’s expected to grow by a moderate 8.2% annually, with a dividend yield that could increase by 5% annually.
Using this data, I’ve calculated that if I buy 500 Legal & General shares and reinvest my dividends, my investment could grow to £2,780 in five years.
Unfortunately, Legal & General’s favourable dividend position is offset by a high debt-to-equity (D/E) ratio of 670%. With negative cash flow and short-term liabilities not covered by assets, I feel this makes it a risky investment.
