As interest rates continue to rise in the UK, safe stocks on the FTSE 100 with high yields are where I think investors can potentially get the best returns. Below are two cheap dividend stocks that I’m thinking of buying.
Reckitt
Reckitt (LSE: RKT) is the parent company of most of the hygiene and health products you can find at home (Lysol, Durex, and Nurofen just to name a few). Reckitt’s stock has fluctuated in the same range for the past five years, without much return or loss. But investors would be sitting at an almost 20% loss if they had bought at the peak in July 2020.
Trading at a meagre price-to-sales ratio of 2.75x, its valuation is near its all-time low in over a decade.
What’s even more attractive about Reckitt is its consistency in dividends. For the past decade, Reckitt has maintained an average yield above 2%, which has increased to over 3% in the past year. Just recently, it raised its dividend again by 4.9%.
| Year | Average Yield |
|---|---|
| 2023 | 3.75% |
| 2022 | 3.04% |
| 2021 | 2.78% |
| 2020 | 2.53% |
| 2019 | 2.84% |
| 2018 | 2.64% |
| 2017 | 2.19% |
| 2016 | 2.17% |
| 2015 | 2.38% |
| 2014 | 2.69% |
| 2013 | 2.82% |
Fundamentals for the stock are improving as well. A big reason for the share price’s sell-off was that Reckitt couldn’t pass on inflation to its consumers. For example, after raising prices by 8.4%, its volume of sales fell by 4.3%. However, management is expecting inflationary pressures to cool off. In addition, the company also improved gross margins to 59.4%, a 130-basis point improvement and a return to 2020 levels.
Though inflation is falling, it’s still expected to remain between 4-5% throughout 2024, which will put pressure on the company in the near term. In addition, its latest sales volumes haven’t been released yet. If the cooling inflation can’t improve its sales volume, the share price could fall further as investors question the company’s market leadership.
Lloyds
Year-to-date, Lloyds (LSE: LLOY) shares have fallen over 13%. Lloyd is trading at a meagre price-to-sales ratio of 1.37x, a number not seen since 2020 when lockdowns hurt its business.
In late July, Lloyds raised dividends again to £0.63, continuing its trend of growing payouts. Looking at the stock’s fundamentals, there are good reasons for it to continue increasing. Lloyd’s net interest income (the difference between a bank’s interest it earns from loaning and its interest expenses from deposits) still grew 7.2% year on year in 1H 2023. Because of central bank interest rate hikes in the UK, banks such as Lloyds can charge higher interest rates to consumers and, as a result, massively increase their net interest income.
The biggest risk to Lloyds is its mortgage segment. High interest rates also mean fewer people getting new mortgages and refinancing properties. However, it’s being offset by Lloyd’s loans as reported by management in its 1H report. So even though growth might be slower, I’m confident that Lloyds can increase or at least maintain its dividend yield.
Conclusion
The reason I’m eyeing these two stocks is because they are trading at a reasonable price, have good track records of paying dividends, and finally have good underlying fundamentals going for them. Though some risks still exist, they present a good risk-to-reward ratio to me right now.
