Buying cheap shares that pay dividends could potentially help me build wealth in two ways.
If the price rises so that the shares are no longer as cheap, my holding may increase in value. Meanwhile, I could earn passive income in the form of dividends.
That might not happen in practice. Dividends are never guaranteed and sometimes what may look like cheap shares in fact turn out to be value traps.
So I am on the lookout for the right sort of shares in proven, quality businesses. If I had spare money to invest in the coming month, here are three I would happily buy for my portfolio.
ITV
I already own quite a few ITV (LSE: ITV) shares. But I think this cheap share looks so undervalued I am keen to buy more.
ITV is close to the lowest prices at which it has traded over the past five years. It is 55% down in that period.
Yet it remains firmly profitable and has a dividend yield of 8.4%. Although dividends are never guaranteed, the company has said it aims to maintain or improve on the current shareholder payout.
There are risks here, such as a decline in advertising demand hurting revenues and profits.
But ITV has a profitable legacy business, fast-growing digital footprint, and a production operation that has been a money spinner in recent years.
Topps Tiles
Another cheap share I own and would happily buy more of in February is Topps Tiles (LSE: TPT).
Topps yields 7.8%. Like ITV, the five-year share price chart shows a decline, this time of 32%.
A trading update this month pointed to some of the risks a weak housing market poses. Like-for-like sales in the most recent quarter fell 7.1% year on year. Inflationary pressure remains a risk to profits.
But last year saw the company’s biggest ever revenues and Topps now sells one in five tiles purchased in the UK. It has a growing online business alongside its depot network. The company successfully targets both trade and retail customers across its different sales channels.
Yet Topps is trading as a penny share — despite its strong potential and proven business model.
Diageo
There are some cheap shares I do not own whose current price has put them on my shopping list.
One is Diageo (LSE: DGE). The maker of Guinness and Tanqueray is trading on a price-to-earnings ratio of 17. That might not seem cheap. Relative to the long-term potential of its premium brand portfolio and the pricing power that gives Diageo, though, I think the current valuation looks attractive.
There are risks such as weaker demand in Latin America, flagged by the company in this week’s interim results. That could happen elsewhere if the global outlook remains sluggish.
But I think that is already reflected in the share price, which has fallen 19% over the past year. On a five-year timeframe, the fall has been only 2%. The yield is 2.8% and the Dividend Aristocrat announced this week a 5% increase in its interim dividend. The company has raised its shareholder payout annually for well over three decades.
