Where am I investing my savings in June? I’m looking no further than cheap UK shares. That’s because low valuations can mean higher dividend yields, which could significantly boost my passive income.
I say ‘could’ because no dividend is set in stone. They can get reduced or axed altogether.
To mitigate this risk, I hold a basket of income stocks in my ISA. Here are two of them that I like right now.
British American Tobacco
First up, I find the forward yield of British American Tobacco (LSE: BATS) very attractive. At the current share price of 2,389p, it sits at a hefty 10.1%. It rises to 10.6% in 2025, if forecasts prove correct.
Of course, the yield isn’t that high for nothing. Smoking volumes are in decline, while the firm’s new category products like vaping and oral tobacco might never be as profitable as cigarettes.
Also, the FTSE 100 company has sizeable debt and has admitted that its cigarette brands (including Lucky Strike and Dunhill) will be worthless in the US within three decades’ time. In December, it took a $31.5bn non-cash impairment on the value of these brands.
Despite this, I think the potential rewards outweigh the risks. The stock is trading on a price-to-earnings (P/E) ratio of just 6.2. That’s incredibly cheap for a company still expected to grow its underlying operating profit in the mid-single-digits by 2026.
It’s buying back a big chunk of its own shares and management remains committed to a progressive dividend policy. Meanwhile, net debt has been reduced from £44.2bn in 2018 to less than £34bn last year.
And while vaping is coming under regulatory scrutiny, I don’t expect it to be banned. That’s because vaping is at least 95% less harmful than smoking, according to Public Health England.
Cigarette volumes have been declining for decades, yet British American Tobacco is still generating substantial profits. I don’t see that changing soon enough to threaten the dividend.
BBGI Global Infrastructure
Next, we have BBGI Global Infrastructure (LSE: BBGI). This is a FTSE 250 company dedicated to social infrastructure investments. These include toll bridges, schools, hospitals, motorways and army barracks.
These projects often have long-term contracts that are government-backed. Additionally, many contracts include inflation-linked adjustments, providing BBGI with a predictable and stable income stream.
For investors, this translates into a nice 6.5% forward dividend yield.
Meanwhile, the firm estimates that the projected cash flows from its existing 56-asset portfolio are enough to sustain a growing dividend for the next 15 years!
So, what’s the catch?
Well, higher interest rates are a headwind here. They make financing new projects costlier, limiting the portfolio’s growth potential.
Plus, the fund suffered a 1.4% decline in net asset value (NAV) due to higher rates last year.
Nevertheless, the dividend looks rock-solid to me. And for patient investors, there may be some decent share price gains too. That’s because BBGI is trading at a 12% discount to NAV, which is historically rare.
In March, the firm said: “As governments continue to run deficits and demand for maintaining,
repairing, and constructing new infrastructure grows, there is an increasing need for private sector investment in infrastructure, presenting long-term opportunities for BBGI.”
Looking ahead, I’m very optimistic about the prospects for this dividend stock.
