One way of unearthing cheap UK shares is to examine the dividend. A generous yield could be flagging a company with a modest valuation.
Another useful step to take when researching shares is to try to figure out whether shareholder dividend payments are sustainable in the coming years.
Of course, looking ahead isn’t easy. But I reckon it’s important to try because we invest ‘ahead’, so to speak. And one of the things I like to see is a multi-year record of consistent cash inflow.
Where I’m finding cheap UK shares
The past is no reliable guide to the future but I think a solid trading record demonstrating the cash-generating qualities of a business is a good start. And we can find many solid, cash-producing businesses in those sectors known for their defensive nature.
In other words, sectors that tend to be less vulnerable to cyclical ups and downs. I’m thinking of industries such as healthcare, branded fast-moving consumer goods, utilities, energy, IT, technology, food supply and others.
Meanwhile, there’s been something of a dash to cyclical recovery stocks over recent months. And I reckon investors might have left behind some of the defensive stocks. Indeed, some great companies are seeing their share prices wilt a bit right now. And maybe that’s because investors can’t have their money everywhere all at once. If that’s right, perhaps they’ve rotated out of defensive names causing the weaker share prices.
So, I’m shopping for defensive shares that can be bought and held until 2030 and beyond. And I can’t ignore the biggest defensive yields on offer in that category. They’re to be found in the wider fast-moving consumer goods sector with smoking products companies British American Tobacco and Imperial Brands.
Other stocks on my radar
Both companies are yielding above 7% and they each sport an impressive record of cash inflow and shareholder payments. I think it’s clear the tobacco sector is out of favour with investors right now.
However, there’s also good value among companies dealing in less dangerous products. For example, I’m keen on Unilever’s forward-looking yield running near 3.5%. The firm is perhaps the king of fast-moving consumer goods on the London market and it usually looks expensive. So, I tend to become interested whenever there’s weakness in the share price.
In the FTSE 250, soft drinks supplier Britvic has an interesting yield running above 3.5%. I think the stock would make an excellent long-term hold in my portfolio. Finally, I’d pursue the theme of fast-moving goods with DS Smith. The packaging company serves the supply chain of the industry and is yielding above 3.5% as I write.
In healthcare, I’d go for GlaxoSmithKline’s yield, which is just below 6%. And in energy and utilities, my picks for further research are National Grid yielding above 5%, Severn Trent above 4%, and SSE just higher than 5%. Finally, I like the look of business software provider Sage with its yield above 3%.
Dividend yield won’t tell me everything for making good long-term share picks. But, to me, this list of 10 names is a decent jumping-off point for further thorough research.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Britvic, DS Smith, GlaxoSmithKline, Imperial Brands, Sage Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.