As we head into a new month, I want to look at the opportunities that are available for me right now. As an income investor, I want to look for cheap UK dividend shares to add to my portfolio. Here are some that I think look appealing at the moment.
Buying the dip
One metric I look at when deciding what makes a UK dividend share cheap is recent share movement. So over the past month, have any stocks lost ground that could be a good buy?
I can filter for stocks that have fallen over the past month. For example, both Aviva and AstraZeneca have fallen roughly 5% over this period. I could use a longer timeframe, but I want to capitalize on the cheap dividend shares right now.
I don’t think these short-term moves lower are anything to be overly concerned about. Aviva is a well-capitalized insurance company, with liquidity as of February of £4.1bn. AstraZeneca is also performing well, with H1 results showing revenue growth of 9%, excluding the Covid-19 vaccine.
With these numbers giving me confidence, I see the fall in the shares last month as a blip that makes both cheap dividend shares to buy now.
This is because with shares in both of these companies falling, it helps to increase the dividend yield. The yield calculation looks at the dividend per share relative to the current share price. With the dividend per share not changing that often, a move lower in the share price naturally increases the yield.
A risk for both of these companies is that the short-term move lower could turn into a more serious slump. If we see another stock market crash, then even if the companies are sound, the share price could still fall due to broader risk sentiment.
More cheap UK dividend shares
Another measure of cheap UK dividend shares is the price-to-earnings ratio. In my opinion, the lower the ratio, the more undervalued the company is. This is because the price is a lower multiple of the earnings, which might reflect a mispriced share.
In this regard, I’ve noted Legal & General and Imperial Brands. The stocks have a P/E ratio of 8.45 and 9.74 respectively. Anything below 10 is a low figure in my book, putting these cheap dividend shares in the lowest quartile of the FTSE 100 index.
In a similar way to Aviva, Legal & General has good liquidity and a strong balance sheet. I think this will enable the company to continue to pay out dividends in a sustainable way. Imperial Brands is a higher risk stock to buy, given the consumer trend of moving away from traditional tobacco products. However, with a dividend yield in excess of 8%, it’s a risk I’m happy to take.
Overall, by looking to buy cheaper dividend shares instead of more expensive ones, I can look to build a higher yield income portfolio.
