I’m always hunting for cheap dividend shares to add to my passive income portfolio. When prices rise, yields dip — but when the opposite happens, dividend stocks become very attractive. Grabbing some high-yielding, undervalued shares just before the ex-dividend date1 can lead to a handsome payout!
But it’s also important to think long term. If an undervalued stock doesn’t have recovery potential, it could be all for nothing.
With that in mind, here are two UK dividend stocks that look cheap right now. I’m keen to find out where they might be in a year.
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!
Imperial Brands
Imperial Brands (LSE: IMB) is a UK multinational tobacco company known for Winston cigarettes and Backwoods cigars. It’s been pivoting towards less harmful next-gen products (NGPs) like vapes and e-cigarettes. The dividend yield is a decent 5.3% with a payout ratio of 51% — more than enough coverage.
But declining smoking rates and evolving regulatory landscapes are challenges the company has faced. Although the transition to NGPs is promising, they’re currently loss-making and their long-term profitability is uncertain. Subsequently, the company has run up £9bn in debt which puts profits (and dividend payments) at risk.
Still, earnings beat expectations last year and its net margin has increased from 9% to 14% since 2022.
With a below-average price-to-earnings (P/E) ratio of only 9, it looks like it has space for more growth. Plus, it’s trading at 44% below value using a discounted cash flow model. That’s impressive, considering the stock is up 69% in the past year – somehow, it still looks cheap!
If that performance continues, it could be a lucrative passive income machine in the future. So I think it’s a strong dividend stock that’s worth looking into now.
Paypoint
Paypoint (LSE: PAY) is a £444m FTSE 250 company specialising in multichannel payment and retail services. Many Britons use its services on a daily basis without even realising it.
The business operates across four main divisions: shopping, e-commerce, payments and vouchers. It provides digital solutions and payment services to small and medium-sized enterprises (SMEs), along with Open Banking services for payments via direct debit, cards and cash.
Being in the finance sector, it faces specific challenges from economic downturns and regulatory changes, not to mention strong competition. It’s also at risk of technological advancements that could render its services obsolete.
Performance in 2024 was impressive though, with underlying EBITDA up 32.6% and profit before tax up 21.5%. The dividend yield sits at 6.3% and it has a trailing P/E ratio of 11.43. Its otherwise solid dividend track record was dented by reductions in 2019 and 2021. However, dividends have still grown at an annual rate of 4.84% over the past 15 years.
To further affirm its dedication to shareholders, it recently announced a three-year £20m share buyback programme.
Why these stocks?
The above stocks were chosen based on their dividend history, financial performance and low valuation. Plus, their future return on equity (ROE) is forecast to be above 30%.
These metrics are used to reveal companies that are trading below their intrinsic value and have good growth potential. I believe they are both well worth considering as part of a long-term passive income investment strategy.
1 The ex-dividend date is the date before which an investor buying shares will qualify for that period’s dividend.
