3 cheap shares with dividend yields of up to 9%

These three cheap FTSE 250 shares all offer market-thrashing dividend yields of up to 8.7% a year. But which would I buy today for extra passive income?

A person holding onto a fan of twenty pound notes

Image source: Getty Images.

Almost daily, I scour the London Stock Exchange, looking for cheap shares in quality companies. I do this for two reasons. First, to find attractive stocks for my family portfolio. Second, to find sound businesses to bring to the attention of other equity investors among family and friends. And thanks to heightened volatility in 2022, my focus has been on shares offering market-beating dividend yields.

Three FTSE 250 shares with high dividend yields

Usually, I restrict my stock screening to the blue-chip FTSE 100 index, where bumper dividend yields are easy to find. However, today I dug deep into the mid-cap FTSE 250 index, looking for high-yielding stocks. Here are three that quickly caught my eye.

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CompanyShare price (p)12-month changeMarket value (£bn)Price/earningsEarnings yieldDividend yieldDividend cover
Direct Line Insurance Group260.00-12.6%3.410.89.3%8.7%1.1
Jupiter Fund Management178.40-35.7%1.06.615.1%6.6%2.3
CMC Markets309.50-36.6%0.99.4810.5%8.1%1.3
Figures based on Friday’s closing prices

These three companies are fairly substantial, with market caps ranging from around £1bn to £3.4bn. Interestingly, being financial firms, all three are in the same broad industry. Direct Line Insurance Group, founded in 1985, is a leading provider of general insurance products, including home and motor policies. Jupiter Fund Management — also founded in 1985 — is one of the UK’s leading asset managers, specialising in equity and bond funds. And CMC Markets, founded in 1989, is one of London’s largest trading and spread-betting platforms. But what draws me to this trio is high dividend yields.

All three FTSE 250 shares trade on modest price-to-earnings (P/E) ratios, ranging from 6.6 to 10.8. The average across all three is nine times earning.s To me, this suggest this trio may be overlooked, unloved or just plain old cheap. Furthermore, the average earnings yield across these three stocks is a market-beating 11.6%. And their dividend yields — for me, their main attraction — range from 6.6% a year at Jupiter to 8.7% a year at Direct Line. The average cash yield across all three comes to a tidy 7.8% a year. Nice.

Which FTSE 250 stock would I buy now?

I don’t own any of these three shares, but I’d gladly buy all three right now to add extra passive income to my family portfolio. However, I would never create a portfolio with only three shares in it, especially three stocks from the same industry. Such a portfolio would be highly concentrated and, therefore, likely to be highly volatile at times.

What’s more, all three of these shares could suffer if global financial markets have another meltdown, as happened in spring 2020 (and in the US this calendar year). In such a downturn, the three stocks could drop at once. Also, rising interest rates and red-hot inflation, plus slowing economic growth, could hit the firms’ shares. Despite this, I’d still buy these stocks today for their bumper dividend yields!

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

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That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management. 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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