So far, 2022 has been a wild ride for global stock markets. On Thursday, the US S&P 500 index had crashed almost 20% below its 3 January all-time high, before rebounding. Likewise, plunging US tech stocks have sent the Nasdaq Composite index diving more than a quarter (-25.5%) over the past six months. Meanwhile, the FTSE 100 index is an oasis of calm, up 0.5% in 2022. Hence, here are three cheap shares that I don’t own, but would gladly buy today for their bumper dividend yields.
Three cheap shares paying delicious dividends
As a veteran value investor, I love buying cheap shares in quality companies. In particular, I’m always on the lookout for shares with low price-to-earnings ratios, high earnings yields and market-beating dividend yields. Here are three cheap FTSE 100 shares that fit my bill today.
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| Company | Sector | Share price (p) | 12-month change | Market value (£bn) | P/E | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Housebuilding | 2,111.0 | -32.9% | 6.7 | 8.6 | 11.6% | 11.1% | 1.0 |
| Rio Tinto | Mining | 5,328.0 | -13.2% | 89.0 | 5.0 | 19.9% | 10.8% | 1.8 |
| Imperial Brands | Tobacco | 1,690.8 | 1.3% | 16.1 | 5.7 | 17.7% | 8.2% | 2.2 |
What attracts me to these three cheap shares? First, they’re all rated on low earnings multiples, ranging from five to 8.6 times. The average price-to-earnings ratio across all three is just 6.4. Second, they offer bumper earnings yields: one approaching 20%, with the average being 16.4%. Third, all three pay generous cash dividends to patient shareholders. Across these three FTSE 100 shares, the average dividend yield comes to 10.1% a year — double digits, whoa.
That said, dividend cover varies widely across these three cheap shares. At housebuilder Persimmon, earnings barely cover dividends. This lack of dividend cover suggests that this firm might cut its cash payouts during a downturn. However, at Imperial Brands, dividend cover is a healthy 2.2 times its cash yield. Then again, Imperial had a hefty net-debt burden of almost £9.4bn as at 30 September 2021.
Another thing that draws me to these shares is that they have all underperformed the wider FTSE 100 over the past 12 months. While the Footsie gained 5.3% over the past year, Persimmon shares slumped by almost a third. Likewise, fears of a slowdown in China — the world’s growth engine — have pushed down Rio Tinto shares by more than 13% over 12 months.
This is not a portfolio
While I’d happily buy a stake today in all three of these quality businesses with cheap shares, I would never put all of my capital into just three stocks. Such a portfolio would be highly concentrated and, therefore, extremely risky. Also, each of these companies faces unique obstacles right now. Rising UK interest rates make mortgages more expensive — and a housing-market slowdown could hit Persimmon. Similarly, slowing global growth (or a full-blown recession) could curb Rio Tinto’s earnings. And Imperial Brands’ products are bad for its customers (smokers).
Nevertheless, like John D Rockefeller, I love to see my cash dividends come rolling in. That’s why I would happily buy and hold these three cheap shares for the long term!
