8.1% and 5.4% yields! Should I buy these cheap FTSE 100 shares?

These two FTSE 100 shares look like they could be too cheap to miss. Should I buy them to boost my long-term passive income?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I don’t have unlimited reserves of cash I can use to buy UK shares. So I’m looking for the best cheap FTSE 100 shares to buy today.

Should I add these two cheap dividend stocks to my investment portfolio?

Lloyds Banking Group

At 5.4%, Lloyds Bank (LSE:LLOY) shares offer a dividend yield comfortably north of the 3.9% FTSE 100 average. Yet despite this I don’t see the business as an attractive way to boost my income.

The profits these companies make are highly dependent on broader economic conditions. Loan defaults can soar, as Britain’s banks witnessed last year (credit impairments at Lloyds soared to £1.5bn in 2022). It can also be a fierce struggle to grow revenues in difficult times.

The problem for this particular bank is twofold. The UK economy looks set for a prolonged period of weak GDP growth due to severe structural issues like labour shortages, weak private and public investment, low productivity and Brexit-related trade disruption.

And unfortunately Lloyds doesn’t have exposure to foreign climes to offset probable weakness at home. HSBC (LSE:HSBA) and Santander, by comparison, can look to fast-growing Asia and Latin America respectively to turbocharge profits. Barclays investors can expect the company’s US operations to boost the bottom line.

I’m also mindful that unfavourable interest rate movements might cause earnings disappointment for Lloyds.

It’s possible that the Bank of England (BoE) might keep tightening policy to combat persistent inflation. This would boost the margin between the interest they charge borrowers and offer to savers still further, boosting profits in the process.

But comments from key policymakers in recent weeks casts doubt on any additional monetary tightening. Just today BoE rate setter Swati Dhingra called for interest rates to be frozen at current levels of 4%.

These long-term threats mean that I’m keen to avoid Lloyds shares. Not even a rock-bottom price-to-earnings (P/E) ratio of 7.5 times is enough to tempt me to invest.

HSBC Holdings

I believe the aforementioned HSBC would be a better way for me to invest in London’s banking sector. This business certainly offers superior value for money compared with Lloyds share price, at least on paper.

The Asian banking giant trades on a forward P/E ratio of 6 times. and carries an 8.1% dividend yield for 2022. But better value isn’t the only reason.

It’s true that HSBC also faces significant risks of its own. Lower-than-expected interest rates would also damage the profits it makes on its lending activities. On top of this, uncertainty surrounds its key Chinese market and neighbouring territories as the Covid-19 crisis endures.

But as a long-term investor I’d be happy to absorb these risks. This is because I believe the eventual returns this share delivers could be spectacular as emerging market demand for financial services soars. Banking product penetration remains extremely low while personal wealth levels are rising strongly.

HSBC served a whopping 39m customers in 2022. I’m expecting the number to keep soaring as the banking market balloons and the firm invests billions of dollars to expand.

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 assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, and Lloyds Banking Group Plc. 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »