A once-in-a-decade chance to fill an empty ISA with cheap, high-yield UK shares

A heap of UK shares are trading on low valuations while paying generous dividends. I’m buying all I can afford before they recover.

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UK shares look cheap. The numbers confirm it. The FTSE 100 is trading at around 15 times earnings, measured by the CAPE ratio (a 10-year period rather than the single year of by price-to-earnings ratio). By contrast, the US S&P is above 30 times.

The FTSE 100 has climbed just 1.86% so far in 2023. The S&P 500 is up 19.82% and the German Dax is up 17.06%. We’ve got some catching up to do.

There are good reasons why UK shares are out of favour. Our inflation is stickier than elsewhere. The Bank of England is likely to hike rates for longer to bring it down. That will weigh on businesses, consumers and the housing market. We’re not out of the woods yet.

There’s an opportunity here

Yet I reckon the gloom has been overdone. Forecasters have repeatedly claimed the UK is heading for a recession. It still hasn’t happened.

Others warn of a 25% house price crash. Given the importance of property to our economy, that would be a massive blow. Yet so far, it’s been resilient. Last week, mortgage rates fell, offering another ray of hope. 

The FTSE 100 is showing signs of life, adding almost 500 points since June’s lower-than-expected inflation figure. I’m going bargain hunting before the world wakes up and smells the opportunity.

I haven’t been this excited about buying FTSE 100 shares for a decade. If my Stocks and Shares ISA was empty (hint: it isn’t), I’d waste no time and fill it.

I went into overdrive when the FTSE 100 dipped to around 7,250 a couple of weeks ago. I started by targeting dirt cheap dividend stocks with amazing yields that looked sustainable.

To my surprise, wealth manager M&G fell into that category. It made a loss last year and was yielding 10% when I bought it. That looks like a double warning sign. But this year should bring profits and management is keen to reward loyal shareholders.

Buying Legal & General Group was a no-brainer. It was trading at around six times earnings and yielding almost 9% when I snapped it up. It should also benefit when stock markets rise, which should give its ailing LGIM investment division a much-needed boost. 

So many stocks to buy

I also bought Lloyds Banking Group and Glencore, which offer terrific yields at low valuations. As well as FTSE 100 growth stocks Smurfit Kappa Group, the Scottish Mortgage Investment Trust and Unilever.

Now I’m targeting high yielders again. I’m keen to buy housebuilder Taylor Wimpey, which trades at 6.19 times earnings and yields 8.15%. Also mining giant Rio Tinto, which trades at 8.15 times earnings and yields 7.94%. As ever, these dividends are never guaranteed. Both are on the high side. Their low valuations could signal a value trap. Buying shares is never without risk.

I could be wrong about the recovery too. Market movements are impossible to predict. UK inflation could stay high in July, forcing the BoE to squeeze more life out of the economy. The FTSE 100 could remain volatile.

Yet I plan to hold all of my share purchases for a decade or more. This gives them plenty of time to overcome short-term setbacks. My dividends will keep rolling up, and buying more stock. It’s a terrific chance and I can honestly say I’m not wasting it.

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.

Harvey Jones has positions in Legal & General Group Plc, M&G Plc, Rio Tinto Group, Scottish Mortgage Investment Trust Plc, and Smurfit Kappa Group Plc. The Motley Fool UK has recommended M&G 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.

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