Since late June, my wife and I have been on a buying spree. In recent months, we bought cheap shares in 16 companies. Some of these these stocks we own for the first time. However, we aim to hold them for a long-term boost to our passive income.
Passive income is my favourite
My all-time hero, American billionaire and philanthropist Warren Buffett, is a big fan of passive income. He once warned, “If you don’t find a way to make money while you sleep, you will work until you die”.
The many types of unearned income include savings interest, rental income, bond coupons, and so on. But my favourite form of passive income is share dividends. These are regular cash sums paid to shareholders by companies, usually quarterly or half-yearly.
Not all companies pay out cash dividends, and these payouts are not guaranteed. Sometimes, even the biggest companies cut or cancel their dividends during hard times. Despite this, I love collecting share dividends to reinvest in yet more shares (or help pay my surging bills).
Six high-yielding cheap shares
For example, here are six shares that my wife bought earlier this year for our family portfolio. Each offers a market-beating cash yield that beats the FTSE 100 index’s dividend yield of around 4% a year.
| Company | Business | Share price | 52-week high | 12-month change |
| Persimmon | Housebuilder | 1,333.5p | 2,930p | -50.5% |
| Direct Line | Insurer | 210.7p | 313.7p | -23.7% |
| Rio Tinto | Miner | 5,438p | 6,343p | +20.5% |
| Legal & General | Insurer | 246.5p | 309.9p | -16.0% |
| Aviva | Insurer | 439.2p | 606.58p | -16.9% |
| ITV | Broadcaster | 78.5p | 126.99p | -37.5% |
We bought these shares for passive income after they had all fallen sizeably from their 2021/22 price highs. In short, we seized the opportunity to buy these cheap shares at lower prices. For me, each of these businesses was a ‘fallen angel’ with potential for future price gains, as well as regular dividends.
Are these shares still cheap today?
From the table below, I would argue that most of these UK shares are still fairly priced or cheap, even after recent price rebounds:
| Company | Business | Market value | Price-to-earnings ratio | Earnings yield | Dividend yield | Dividend cover |
| Persimmon | Housebuilder | £4.3bn | 5.8 | 17.2% | 17.6% | 1.0 |
| Direct Line | Insurer | £2.8bn | 10.5 | 9.5% | 10.8% | 0.9 |
| Rio Tinto | Miner | £88.7bn | 5.9 | 16.9% | 9.7% | 1.7 |
| Legal & General | Insurer | £14.7bn | 7.3 | 13.8% | 9.7% | 1.4 |
| Aviva | Insurer | £12.3bn | 9.0 | 11.1% | 6.8% | 1.6 |
| ITV | Broadcaster | £3.2bn | 6.7 | 14.9% | 6.4% | 2.3 |
| Averages | 7.5 | 13.9% | 10.2% | 1.5 |
Looking at this mini-portfolio of six shares overall, it offers an average dividend yield in double digits. What’s more, this cash yield is covered 1.5 times by earnings, which offers a reasonable margin of safety. To me, these shares still have potential to do what we originally wanted: produce extra passive income for our portfolio.
Finally, I am braced for further volatility in these (and other) shares in 2022/23. After all, UK consumer confidence is being walloped by sky-high inflation, crippling energy and fuel bills, and rising interest rates. And the risks of a full-blown recession are rising. But we’re playing a 10-year game or more, so I’m not too worried!
