4 cheap FTSE 100 shares I’d buy in May for dividends!

For me, the best form of passive income is generous FTSE 100 dividends. Here are four cheap shares that I’d buy today and hold for their bumper income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Since the 2022-23 tax year started on 6 April, I’ve been considering which cheap shares to buy for my family portfolio. This year, I’m treading cautiously, largely because I’m anxious about several factors. I’m worried about the Covid-19 pandemic, Russia’s invasion of Ukraine, rising interest rates to cool inflation, and lockdowns slowing Chinese growth. That’s why my stock-picking in 2022 has been largely confined to the UK’s blue-chip FTSE 100 index.

Bargain hunting in the FTSE 100

In the second half of 2021, I made two important decisions. First, I saw US shares (especially tech stocks) as too expensive for me. Second, we would build a cash war chest to invest in cheap (and perhaps overlooked and unwanted) FTSE 100 shares. In particular, I’m keen to boost our passive income by buying quality shares paying attractive cash dividends.

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Dividends are regular cash payments made to shareholders by companies. But company dividends are not guaranteed, so they can be cut or cancelled at any time. Even so, there is no shortage of solid FTSE 100 companies offering market-beating dividend yields today.

Four Footsie dividend dynamos

In a quick trawl through the FTSE 100 using a stock screener, I searched for shares trading on low earnings multiples and with high dividend yields. Here are four dividend dynamos I found lurking in the UK’s main market index:

CompanySectorShare price (p)Market value (£bn)P/EEarnings yieldDividend yieldDividend cover
PersimmonHomebuilding2,098.06.78.511.7%11.2%1.0
Rio TintoMining5,762.097.75.518.1%10.0%1.8
Imperial BrandsTobacco1,664.515.85.618.0%8.3%2.2
British American TobaccoTobacco3,349.576.311.68.6%6.5%1.3
Shares prices as at late Friday, 29/04/2022

As you can see, the dividend yields on offer from these four Footsie shares range from 6.5% a year at British American Tobacco to a juicy 11.2% a year from Persimmon. Across all four shares, the average dividend yield comes to 9% a year. That’s 2.25 times the roughly 4% cash yield on offer from the wider FTSE 100.

At Imperial Brands, earnings cover the dividend payout by a factor of 2.2 times. And at global mega-miner Rio Tinto, dividend cover is a healthy 1.8 times. However, one of these dividend yields is not well-covered by company earnings. Alas, dividend cover falls to one at housebuilder Persimmon, so this double-digit cash yield could be at risk if company earnings fail to grow or fall in future.

Another point I’d make is that, relatively speaking, these shares are lowly rated versus their earnings. Price-to-earnings ratios vary from just 5.5 at Rio to 11.6 at BAT. The average earnings multiple across all four shares is 7.8, versus around 14 for the FTSE 100 index. That looks cheap to me.

Which share(s) would I buy today?

As a veteran value investor, I’d buy all four shares today. Each of these companies faces its own future problems. However, for me, their high dividend yields mostly compensate for these risks. Also, to boost my future capital gains, I could invest some or all of my cash dividends into yet more shares, boosting my shareholdings. And if Mr Market has another meltdown, my dividends will help to offset some price declines. That’s why I’m such a big fan of dividend/income investing today!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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