Cheap dividend stocks abound in the UK market but not all of them are necessarily great buys. Lately, I’ve been running the rule on two companies I used to hold and wondering whether their low prices tags and bumper income make them worth adding back to my Stocks and Shares ISA.
Huge yield
I lost faith in Broadcaster ITV (LSE: ITV) a few years ago. To date, it was a wise decision to sell. The FTSE 250 member’s share price has been stuck between 60p and 80p for about two-and-a-half years.
I do miss the passive income, though. Would I go back?
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Well, the dividend yield remains juicy at 6.4%. That’s very impressive considering the shares are actually up 25% since January.
If City analysts have got their sums right, this income also looks set to be covered by full-year profit. This is despite total revenue dipping 3% during the first half of 2024 due to a slightly sticky patch for its Studios arm.
Bargain valuation?
This slight wobble isn’t sufficient to scare me off. But one thing that does bother me is that ITV has become rather inconsistent in terms of shelling out those dividends. It now returns far less per share than it did before the pandemic struck. On top of this, popular sporting events like Euro 24 don’t happen every year and expensive productions can still fail to grab viewer interest.
A price-to-earnings — or P/E — ratio of just nine arguably takes some of this into account. And with the UK economy seemingly chugging into life again as inflation concerns wane, recent positive momentum could continue.
That said, I’m not rushing to buy until I read the next trading update, due 7 November.
Until then, it goes on my watchlist.
Profit warning
Another company I’ve returned to look at is laser-guided equipment manufactuer Somero Enterprises (LSE: SOM). Despite being a tiddler compared to ITV, the AIM-listed firm also generated a lovely income stream for my portfolio for the years that I owned it.
Unfortunately, a stodgy period of trading, thanks in part to rising interest rates, caused those dividends to yo-yo about the place since I sold. That’s a shame. They can never be guaranteed, of course. But I really look for consistency from anything I buy for income.
It’s fair to say 2024 hasn’t been great so far either. In July, holders were hit in the chops with a profit warning. At the time, management believed that trading would improve in H2. But with sales in its main market — North America — impacted by project delays, Somero might still struggle to meet full-year forecasts.
‘Quality’ dividend stock
Analysts have a 24 cents per share total dividends pencilled in for this financial year. Although I’ve already missed out on the first portion of this, such a return would translate to a big ol’ yield of 6.3%.
Elsewhere, I see that the small-cap still boasts a lot of the hallmarks that I look for: big margins, high returns on the money it puts to work and a solid balance sheet.
Like ITV, I’ll keep an eye on this stock going forward, especially as the valuation is very similar. But I think there are better passive income opportunities out there right now.
