In my view, the London stock market is the place to find income shares to buy. Both the FTSE 100 and FTSE 250 are packed with great stocks with proud income histories. Following years of share price underperformance, a great many can also be snapped up at dirt-cheap prices too.
That prolonged price weakness means many top UK shares carry extremely high dividend yields. Plenty also change hands for rock-bottom price-to-earnings (P/E) ratios.
Let me talk you through two cheap dividend shares that have caught my attention: B&M European Value Retail (LSE:BME) and Investec (LSE:INVP). But are they irresistible bargains or classic income traps?
B&M European Value Retail
B&M shares trade on a forward P/E ratio of 7.8 times. They carry a dividend yield of 6.1% for this year too.
That’s very attractive at first glance. However, I think investors need to take care before considering this income stock. Why? Its sky-high dividend yield today is a product of its sinking share price. Over a 10-year horizon, B&M’s yield consistently ranged far lower, at between 2% and 3%.
The value retailer’s been battered by:
- A series of profit warnings as weak consumer spending has battered revenues.
- Accounting errors that have dented investor confidence.
- Rising costs, including greater labour and freight expenses.
- High-profile management departures.
The problem for me is B&M isn’t showing signs of turning the corner… at least not yet. Like-for-like sales at the core B&M UK division dropped 0.6% in the December quarter. Can it recover as the cost-of-living crisis endures? I’m not convinced.
On the plus side, this year’s expected dividend is covered twice by anticipated earnings, providing a strong layer of protection. However, there’s a strong possibility that B&M’s share price will continue sliding, in my view. I’d rather search for other high-yield stocks to buy.
Investec
Investec’s forward dividend yield is 6.4%, more than double the current average for both the FTSE 100 and FTSE 250. It also carries a low P/E ratio of 8 times.
Risks have risen following the start of the Iran War. With the return of inflation threats and the global economy showing signs of stress, the danger of more credit defaults and reduced loan demand has grown. And so Investec’s shares have fallen in value.
However, I think the bank deserves serious attention at these prices. And especially from passive income investors — in my view, current dividend forecasts look rock solid. This year’s predicted payout’s covered two times by anticipated earnings.
What’s more, Investec’s CET1 capital ratio sits at 12.3%, comfortably above regulatory requirements and which should support more market-beating dividends.
Investec’s raised its annual dividend in 12 of the last 13 years. And over the last decade, the dividend yield has regularly averaged a healthy 4%–6%. Unlike B&M, it has a long record of offering attractive yields.
Can the bank keep delivering market-beating dividends? I’m optimistic it can, underpinned by rising demand for financial services, and especially wealth management in which it’s expanding. I think it’s a top income stock to consider.
