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I’d buy these 5 cheap UK stocks for their dividend yields

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After falling on Monday, the FTSE 100 index has rebounded. On Thursday, it closed at 7,078.35 points, up over 240 points (+3.6%) from Monday’s low. But the index is up only 5.6% over six months, so its rebound since last October has slowed. Yet the Footsie has come a long way since 23 March 2020, when it crashed below 5,000. Today, I believe the Footsie is cheap, both in historical terms and versus other major markets. Indeed, I see deep value, particularly within Footsie mega-caps (the largest London-listed companies). Here are five cheap shares I don’t own but would buy today for their chunky dividend yields.

Five fat FTSE 100 dividends

Dividends — regular cash distributions paid to shareholders — play a vital role in the FTSE 100’s total return. Indeed, it’s estimated that roughly half of the index’s long-term returns have come from reinvesting these payouts. At present, the index has a forecast cash yield of 3.8% for 2021 — and this may rise next year. Also, only a handful of Footsie firms don’t pay dividends to shareholders.

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Today, I screened the FTSE 100’s 101 stocks (one is dual-listed) looking for solid companies offering market-beating cash yields. After narrowing my results to 10 stocks, I chose five cheap shares that offer bumper dividend yields right now. Here are my five dividend dynamos, sorted from highest to lowest yield:

Company Sector Market value Dividend yield
Evraz Mining £8.5bn 13.1%
Rio Tinto Mining £80.1bn 10.1%
M&G Financials £5.3bn 9.0%
Imperial Brands Tobacco £14.7bn 8.9%
Legal & General Financials £16.9bn 6.3%

What each firm does

Each of these five dividend powerhouses is a large business in its own right. The smallest, asset manager M&G, has a market value above £5bn. The largest, global mining giant Rio Tinto, is worth a whopping £80.1bn — a FTSE 100 heavyweight. Two of the five are miners (Rio and Evraz), two are financial firms (M&G and Legal & General), while Imperial Brands is a leading cigarette manufacturer. But what really attracts me to these five is their market-beating dividend yields.

Evraz — a global steelmaker as well as miner, with major operations in Russia, Ukraine and North America — currently pays the highest dividend yield in the FTSE 100. At 13.1% a year, it’s at a level usually associated with distressed businesses. But Evraz’s dividend is covered by both earnings per share and cash flows, so it appears sustainable (for now, at least). Likewise, Rio Tinto’s dividend  yield of 10.1% a year is high, but apparently solid. That said, both companies could suffer if demand for steel and base metals slumps in China — the world’s largest consumer of raw materials.

Third on my list of dividend darlings is investment manager M&G with a dividend yield of 9% a year. Legal & General, its much bigger rival, also offers a market-beating yield of 6.3% a year. Even in the depths of the 2020 Covid-19 market crash, L&G didn’t cut its payout, showing its financial strength. And last on my list is Imperial, whose dividend yield of 8.9% is comfortably covered by its massive cash flows from selling ciggies.

Now for the bad news

Like Rockefeller, I love my share dividends. But I also know that these cash payouts are not guaranteed. They can be cut, cancelled or suspended at any time. Indeed, during the 2020 coronavirus crisis, scores of FTSE 350 firms scrapped or slashed their dividends. That’s why I always spread my risk by investing in a wide range of dividend-paying stocks.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

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