American billionaire businessman Larry Fink once remarked, “When you look at dividend returns on equities versus bond yields, to me it’s a pretty easy decision to be heavily in equities.” What Fink is saying is that, from an income-seeking perspective at least, shares look more attractive than bonds.
When it comes to buying cheap UK shares, I absolutely agree with Fink’s opinion. For me, the FTSE 100 index is packed with cheap shares of good companies that pay market-beating cash dividends to their shareholders. Here are two UK shares that I’d happily buy now (but don’t yet own) for their valuable passive income.
Cheap shares #1: Legal & General
Legal & General Group (LSE: LGEN) is a leading UK provider of life assurance, savings, and investments. Founded in 1836, this household name is over 185 years old. With such a storied pedigree, L&G is a company I’ve admired for decades (even when I worked for rival insurers). These days, L&G manages over a trillion pounds of wealth, with over 10m customers relying on it for savings, pensions, and life insurance. Yet I see L&G’s stock as cheap shares, not least for their bumper dividend yield.
As I write, these cheap shares trade at 263.9p, 11.8% below their 52-week high of 299.2p hit on 13 April. They have a price-to-earnings ratio of 12.4 and an earnings yield of 8%. Those are modest ratings, especially when compared with go-go growth stocks. Furthermore, this £15.6bn FTSE 100 stalwart pays a healthy dividend yield of 6.7% a year. That’s almost three percentage points higher than the wider FTSE 100’s yield. Of course, like all dividends, this pay-out isn’t guaranteed and could be cut, suspended, or cancelled at any time. But L&G paid an increased dividend of 17.57p a share for 2020, despite the Covid-19 crisis.
Dividend shares #2: Rio Tinto
Rio Tinto (LSE: RIO) — Spanish for ‘red river’ — is a vast Anglo-Australian mining group. It’s also one of the FTSE 100’s largest members and a global leader in its field. But perhaps its cheap shares have fallen in value lately because of the relentless rise of ESG (environmental, social, and governance) investing? After all, Rio does a dirty job: digging up and selling iron ore, copper, diamonds, gold, and uranium around the globe.
Rio’s cheap shares currently trade at 6,054p, 10.8% below their 52-week high of 6,788p hit on 10 May. This values this mining monster at £100.4bn, making it a FTSE 100 super-heavyweight. Today, Rio stock trades on a price-to-earnings ratio of 13.9 and an earnings yield of 7.2%. It also offers an attractive dividend yield of 5.7%, roughly two percentage points above the Footsie’s yield. Even more impressively, Rio Tinto paid the UK’s largest dividend by size for 2020, making it the current king of UK dividends.
In summary, when I buy cheap shares, I always remember that I’m placing a bet on a company’s future. I also know that share prices — and indeed dividends — can go up or down for many different reasons. That’s why I use company dividends to boost my passive income, but I don’t rely on them for all of my earnings. And if a company were to drastically cut its dividend, then I might sell its shares. That’s why I only invest in great businesses — and, ideally, only when their shares are cheap!
