7%+ yields! Is it now time to buy these cheap UK dividend stocks?

The dividend yields at these UK stocks smash the 3.7% for FTSE 100 shares. But are they brilliant bargains or simply investor traps?

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These UK dividend stocks offer yields far above the London Stock Exchange average. So should I buy them for my portfolio today?

Direct Line Insurance Group

Insurance premiums are back on the rise. And, ordinarily, this would be good news for businesses like Direct Line (LSE:DLG). The Association of British Insurers said this week that average buildings and content policy prices rose 6% in quarter one.

The problem is that these price increases are being outstripped by soaring claims costs. And as high energy costs, supply chain problems, and the war in Ukraine persist, inflationary pressures will remain a thorn in the side of insurance companies.

Direct Line predicted this month that costs will remain in “high single digits” across its Motor and Home units. This threatens to wreak more devastation on the firm’s profits and dividends in the short-to-medium term.

Last yea,r Direct Line slashed the full-year dividend 67% year on year as it nursed a pre-tax loss of £45.1m. To add to the strain, it endured a big drop in its Solvency II capital ratio, to 147%. This further reduced its capacity and confidence to pay market-smashing dividends.

Like its rivals, the FTSE 250 firm is hiking premiums to improve its margins. But this is steadily draining its customer base and it lost 154,000 of them during the 12 months to March. As the cost-of-living crisis rolls on, people are likely to continue leaving in droves to find cheaper providers.

I like the terrific brand power of Direct Line’s brands. The likes of Churchill, Privilege and Direct Line itself provide a sound base upon which it could build earnings when trading conditions normalise.

But right now the company carries too much risk for my liking. This is why, despite its low price-to-earnings (P/E) ratio of 8.8 times and 7.9% dividend yield for 2023, I’d rather buy other UK stocks.

Pan African Resources

I feel Pan African Resources (LSE:PAF) could be a better option for decent passive income in the near-term and beyond. I’m especially attracted to the mid-tier gold producer today as metal values look poised to hit new peaks above $2,070 per ounce.

I can invest in physical gold or a financial instrument like an exchange-traded fund (ETF) that tracks bullion prices. But if I do this I won’t make any income from my investment. I’ll only make a positive return if metal prices increase.

Conversely, buying Pan African shares gives me a chance to receive a dividend as well as benefit from rising gold prices. And right now, predicted payouts here are quite impressive, its forward dividend yield sitting at 7.1%.

On top of this, the miner’s shares also offer excellent value from an earnings perspective. The business — which owns a string of high-margin gold mines in South Africa — trades on a prospective P/E ratio of just 3.7 times.

Commodity markets can be volatile. And fresh weakness in gold values could hit company profits hard. That said, I believe the cheapness of Pan African shares still makes it a top stock to buy right now.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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