2 cheap shares I bought to try to earn extra income

Our writer is trying to earn extra income by owning two dividend shares. Here, he explains his approach.

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Different people use a variety of methods to try and earn extra income. An approach I like is to buy dividend shares. Hopefully, they can help provide me with a little extra cash from time to time.

Here are two such dividend shares I think are trading at a cheap valuation that I have bought for my portfolio.

Jupiter Fund Management

I own shares of a number of fund managers. I have recently bought Jupiter (LSE: JUP). Like some of its peers, the company now seems to be trading on a cheap valuation. A price-to-earnings (P/E) ratio of 6 looks low, and the dividend yield is 10.7%.

Is that a bargain, or does the price reflect some of the risks ahead? After all, Jupiter has seen its share price fall 43% in a year and is now trading close to a 12-month low.

I think the risk of a recession is hurting valuations in the sector generally, including Jupiter. It saw a net outflow of retail and wholesale assets under management in the first quarter. More money could get pulled if the economy gets worse, threatening both revenues and profits.

But I think there are reasons to be optimistic. The institutional and investment trust businesses both saw net inflows in the quarter, albeit much smaller in size than retail and wholesale. Jupiter has been consistently profitable in recent years and its dividend is comfortably covered by earnings.

It has strong awareness among UK investors and in recent years has also been expanding its international footprint. The double digit percentage dividend yield should hopefully let me earn extra income without working for it.

Lloyds

Another company with a P/E ratio of around 6 is banking giant Lloyds (LSE: LLOY). Its dividend yield is much lower than Jupiter’s. But at 4.5%, I still find it attractive.

The company has also been generating substantial excess cash it could yet use to fund higher dividends. Its share buyback scheme suggests to me that the business is generating more excess capital than it feels it can usefully put to work. That is why it is returning it to shareholders instead.

I do see a risk to Lloyds that any downturn in the housing market could hurt profits. As the nation’s leading mortgage lender, an increase in defaults by borrowers would make it less profitable. On the plus side, the bank’s performance in the past couple of years has been strong. It has a large customer base, a big loan book, and a range of well-known banking brands to attract customers. Those assets could help it make substantial profits to fund dividends in coming years.

How I earn extra income

Simply by owning these two shares I can earn extra income each time they pay dividends. The amount may be modest — £1,000 in each would hopefully earn me £107 from Jupiter and £45 from Lloyds next year. That adds up to just over £150 of extra money.

Dividends are never guaranteed. But if I keep holding the shares and they continue to pay dividends, my initial £2,000 investment may earn me money for years to come.

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.

Christopher Ruane owns Jupiter Fund Management and Lloyds Banking Group. The Motley Fool UK has recommended Jupiter Fund Management and Lloyds Banking Group. 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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