It’s not everyday that I come across ridiculously cheap dividend stocks. But how do I define these? Well, I’m looking for UK shares with a current price-to-earnings (P/E) ratio of less than 10 times. And I’m also looking for a very high dividend yield of more than 5%.
I’ve come across four FTSE 100 stocks that fit my criteria and that I’d snap up today. I’m an income-hungry investor and want to make my money generate passive earnings.
#1: BATS
I’ve commented on British American Tobacco before. It will raise ethical concerns for some investors, but I like it for consistently generating cash flows that it pays out as attractive income.
The stock is trading on a cheap P/E ratio of 8 times and has a dividend yield of 7.5%. What’s more, income is covered by earnings 1.5 times. Of course, there’s no guarantee. But, I can’t complain when this dividend level is on offer.
I like that that the company has upgraded its full-year revenue guidance from 3%–5% to over 5%. And it’s seeing stellar growth from its New Categories products.
But there’s a lot of regulation in the tobacco sector and this isn’t going away. It may place pressure on this cheap dividend stock going forwards.
#2: IMB
I’m sticking with the tobacco sector, and would buy Imperial Brands. It’s BATS’ competitor, but I don’t see this as a problem. The stock is trading on a cheap P/E ratio of 6 times and generates a dividend yield of almost 9%.
The dividend was cut by a third last year to prioritise debt reduction. So this highlights that there’s no guarantee for investors when its comes to income.
But I reckon the worst is over for the company. Next Generation Products or NGPs offer future growth potential as it has primarily invested in vaping through its Blu brand.
#3: Aviva
Aviva isn’t the most exciting of businesses but it generates consistent cash flows. The stock trades on a P/E of 8 times and has a dividend yield of 6.5%, which is covered by earnings.
The new CEO is turning things around and is disposing of non-core businesses. What’s great is that from the sale proceeds, Aviva has confirmed it will be making a capital return to shareholders.
Activist investor Cevian Capital has recently built a 5% stake in the company. For now, both parties seem to be getting on. But this relationship could go sour especially when the investor wants rapid change and the board doesn’t agree. This could place pressure on this cheap dividend stock.
#4: M&G
I think M&G is an attractive stock right now from a valuation point of view. It’s trading on a P/E ratio of 5 times with a dividend yield of almost 8%. What’s more the income is covered by earnings.
But investors need to be aware that M&G hasn’t got a long history of paying out dividends. So there’s no guarantee this level of income is sustainable.
The asset manager suffered in 2020. But with markets now rising and the uncertainty of the pandemic diminishing, this should improve the company’s revenue prospects and profitability. It’s also focusing on sustainable investing, which should help drive long-term growth. Hence I’d buy this cheap high dividend stock.
