Two things I look for when value investing are cheap shares and high dividend yields. That is, I like to hunt down shares that seem undervalued, but also pay out heaps of cash.
Thankfully, the UK’s FTSE 100 is packed with stocks consigned to the ‘bargain bin’ of global equities. Many of these companies are strong, well-established businesses with solid earnings and cash flow. Others are global giants doing well on the world stage.
Cheap shares and big dividends
That said, future dividends are never guaranteed and stressed companies do cut or cancel their payouts. This happened often during the Covid crisis of 2020-21. Nevertheless, most FTSE 100 firms pay out regular — and often rising — dividends to their shareholders.
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As my wife and I both work, we don’t need dividends to spend today. Instead, we invest this cash stream into buying yet more cheap shares, thus turbocharging our future returns.
For example, here are two high-yielding Footsie shares frequently found in income-seeking portfolios that are worth considering.
1. Phoenix
Phoenix Group Holdings (LSE: PHNX) is a consolidator in the UK long-term savings and retirement sector. It offers life insurance, pensions and savings products, while also profitably running off existing books of business. Today, this group is valued at almost £5.3bn.
Phoenix stock is known for its very generous cash payouts, making it a ‘dividend duke’ of the FTSE 100. At the current share price of 520.5p, the cash yield is 10.2% a year. That’s almost three times the wider index’s yearly dividend yield of 3.6%.
Over the past 12 months, the Phoenix share price has ranged from 473p to 581.22p, so it’s currently in the middle of this range. However, while this stock is up 6.4% over one years, it’s dropped by 32.6% over five years.
For the record, my family portfolio includes Phoenix shares, for which we paid 514.9p each. Though this holding’s value has risen by only 1.1% to date, we’re delighted with the double-digit income yield it delivers.
Of course, Phoenix operates in a fiercely competitive environment, dominated by much larger asset managers. Hence, it’s at risk from fee erosion and falling investment returns hitting future profits. Still, it might also become a potential takeover target. That’s why we’re happy to hold this stock for the long term.
2. British American Tobacco
And now for something completely different: British American Tobacco (LSE: BATS), another cheap UK share delivering a high dividend yield. Founded in 1902, this 123-year-old business is one of the world’s leading producers of cigarettes, tobacco and e-cigarettes.
Of course, its biggest-selling products harm and even kill their users (of which I am one). Also, tobacco smoking is declining in most major developed countries. Even so, smokers get through many trillions of cigarettes every year, helping to support the firm’s £74.8bn valuation.
The shares went on a tear in 2024 and have shot up 40% in the past 12 months. Even after this market-beating surge, this stock still offers a dividend yield of 7% a year — almost twice the FTSE 100’s cash yield. Then again, British American Tobacco shares are down 1.74% over five years.
The main reason these cheap shares are not already in my family portfolio is my wife is a vehement anti-smoker, despite that juicy dividend yield!
