One saying attributed to many people (including Danish physicist Neils Bohr), goes: “Prediction is very difficult, especially if it’s about the future”. Having been an investor for 34 years, I couldn’t agree more. I have no idea what will happen to share prices today, tomorrow, or a year away. But, having a mathematical background, I rely on certain indicators to help me decide which cheap shares to buy.
I love cheap shares that pay dividends
As a value investor who knows he can’t predict the future, I often rely on dividends to guide my quest to find cheap shares. Ideally, I’m looking for solid companies with rising revenues, strong cash flows, decent profit margins, and bumper dividends. However, shares of many companies in this category are highly rated, so I aim to uncover hidden value within the FTSE 100.
In another article today, I wrote about the five Footsie heavyweights that pay a third (33%) of all dividends from UK-listed companies. These dividend dynamos each pay out billions in cash every year to their delighted shareholders, usually in quarterly payments. What’s more, they are all mega-cap companies and solid businesses in their respective fields, but with cheap shares.
Here are five more dividend darlings
Using this valuable report, I found the next five biggest-paying dividend giants in the FTSE 100. Again, each of these Goliaths funnels billions of pounds of cash to owners of their cheap shares — and each is among the biggest players in its industry. Here are #6 to #10 of the UK’s dividend powerhouses (in order of dividend size, not yield):
| Company name | Share price (p) | Dividend yield (%) |
| Royal Dutch Shell | 966 | 5.3 |
| AstraZeneca | 7,808 | 2.8 |
| BP | 203 | 8.0 |
| Tesco | 211 | 4.7 |
| BHP Group | 1,507 | 6.2 |
Until they slashed their payments this year, Shell and BP were permanent fixtures in the UK’s top-five dividend heavyweights. Shell slashed its dividend by almost two-thirds, while BP halved its payment, sending them crashing out of the top table. Yet, because of their sheer size as mega-caps, they still appear at #6 and #8 in the above list. Obviously, neither stock is suitable for ethical/environmental investors, but I simply can’t reject their delicious dividends. Hence, I’d happily add both cheap shares to my portfolio for income generation.
As for AstraZeneca, the UK’s biggest pharmaceutical firm, I’m a big fan of this business and its pipeline of potential blockbusters. However, with a dividend yield of just 2.8%, AstraZeneca would not be a candidate for my income portfolio. Nevertheless, I can imagine a bright future for its shareholders, thanks to prospective capital gains.
I’m also drawn to the cheap shares of Tesco. The UK’s #1 supermarket generates huge cash flow to underpin its cash dividends. What’s more, Tesco raised its interim dividend (to be paid on 27 November) to 3.2p, from 2.65p in 2019. That’s a 20.7% hike — and another reason to add it to my watchlist. Lastly, I’m an admirer of BHP, a £76bn miner with global operations. With the prices of iron ore and copper soaring this year, BHP has plenty of scope to increase its hefty dividend. It’s also going on my watchlist of cheap shares.
In summary, I’d keenly buy four out of five of these dividend darlings. And, if you twisted my arm, I’d even throw in AstraZeneca for capital growth. Ideally, I’d buy these cheap shares inside a ISA, to enjoy decades of tax-free dividends (and maybe some capital gains)!
