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.
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:
| Company | Sector | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Homebuilding | 2,098.0 | 6.7 | 8.5 | 11.7% | 11.2% | 1.0 |
| Rio Tinto | Mining | 5,762.0 | 97.7 | 5.5 | 18.1% | 10.0% | 1.8 |
| Imperial Brands | Tobacco | 1,664.5 | 15.8 | 5.6 | 18.0% | 8.3% | 2.2 |
| British American Tobacco | Tobacco | 3,349.5 | 76.3 | 11.6 | 8.6% | 6.5% | 1.3 |
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!
