Looking for cheap shares to buy now? I am, for sure. But we need a way to value shares before we buy.
For me, the key is a good dividend yield. But I also want to see low share prices and good earnings forecasts.
That way, there’s some safety in the dividend, and there’s room for share price growth. It’s no good buying for a big dividend if it ends up not being paid.
Fund management
M&G (LSE: MNG) is in the savings and investment business, serving UK retail customers. With the big squeeze on our cash this year, we might think the shares would have slumped.
But they’re only down a bit. In fact, I’d say the 15% fall since the split from Prudential in 2019 shows a robust stock. And dividends have more than made up for it. Forecasts put the yield at 9.8% now.
What M&G needs is for investors to get back to having some spare cash, and to trust it with the firm to manage.
That might not be this year, and we could see pressure on the dividend. But the UK stock market has a great track record over the past century or so. And I’m quite sure the investors will be back sooner or later. I see a buy for those of us looking for long-term income here.
Rebased dividend
Next up is Target Healthcare REIT (LSE: THRL). The shares are down 25% in the past five years. But they’ve picked up since the firm announced a dividend cut.
Am I mad to go for a falling dividend? I think firms that pay out too much can end up destroying shareholder value. I’d much prefer a steady dividend from one that’s on top of its cash flow.
An interim update on 27 March revealed an “annual dividend target rebased to 5.60 pence per share… providing a sustainable dividend level which will be fully covered by earnings whilst allowing for annual growth”.
Target is in real estate, albeit medical facilities, and I think that’s where the biggest risk will be. But even after the cut, the dividend yield is still around 7%. If that can be sustained, I’d be happy.
New boss
Vodafone (LSE: VOD) is on a 9.5% yield after a long share price slide.
In the past, I’d have kept this one a long way away from my Stocks and Shares ISA. And that’s actually because of the dividends. Earnings have just not covered them, year after year.
Remember what I said about destroying value? Well, this is what I had in mind. So what’s changed?
With full-year results, new boss Margherita Della Valle said: “Today, I am announcing my plans for Vodafone. Our performance has not been good enough. To consistently deliver, Vodafone must change.”
So I hope Vodafone will now focus on cash and grow earnings to cover those dividends. Or it might cut them.
I won’t buy now. But I might do when I see what happens next.
