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As UK stocks enjoy a record month, I’d buy these cheap shares for a passive income

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As I write late on Friday, and with one trading day left in November, what an incredible month it’s been for UK shareholders. News of Joe Biden winning the US presidential election gave global markets an early lift this month. Then news of one, two, and then three highly effective Covid-19 vaccines lit a rocket under share prices. In November, the UK’s FTSE 100 index has surged 790 points (14.2%), adding over £250bn to share values. It’s a similar story over in the US, with the S&P 500 soaring to all-time highs early this week. Yet these two cheap shares in an unloved and undervalued sector have been left far behind in 2020. I’d cheerfully buy both today.

Cheap shares: Shell’s year of hell

While 40 shares in the FTSE 100 are up in 2020, 60 shares have fallen in value this year (and one joined less than a year ago). Among the very worst performers are stocks in banks and energy producers, whose share prices have been crushed by Covid-19. Number 98 out of 101 by performance in the FTSE 100 this year are the cheap shares of Royal Dutch Shell (LSE: RDSB), hit by the double whammy of coronavirus and plunging oil prices.

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At its 52-week high on 6 January 2020, Shell’s share price hit 2,342.5p. Less than 10 months later, it had crashed to a millennial low of 845.1p on 28 October. Frankly, this was an insane bargain, as I argued the very next day. Since then, Shell’s share price has soared by more than half, gushing 54.3% in four weeks. But I think there’s more to come from these cheap shares. After all, they remain down a whopping 41.3% over the past 12 months, slashing Shell’s market value to a mere £106.8bn. Today, Shell’s stock still offers a forward dividend yield of over 5.6% a year, paid quarterly in cash. Hence, I’d buy and hold these cheap shares today, ideally in an ISA, to enjoy a tax-free passive income and capital gains as the global economy recovers.

BP: Big Problems, or Bargain Price?

One place below Shell and 99/101 in the FTSE 100 performance stakes this year is rival oil & gas producer BP (LSE: BP). With similar problems to Shell, BP was in the same boat this year. Indeed, its share price crashed to 25-year lows not seen since the mid-Nineties. On 6 January 2020, BP’s share price hit a 52-week high of 508p, but had crashed to below 189p in late October. This 10-month collapse was one of the biggest valuation losses by a single stock in UK history. However, BP shares closed at 262.9p on Friday, having enjoyed one of their best-ever months. BP’s stock is up more than a third (66.3p, or 33.7%) since Halloween.

Nevertheless, I believe these cheap shares have much further to go. Yes, like Shell, BP must undergo enforced evolution in the transition to a lower-carbon world. But it is responding by losing thousands of jobs, slashing capital expenditures, and cutting its running costs. Meanwhile, the price of a barrel of Brent Crude has leapt by roughly $10 to $48 this month, hugely boosting BP’s revenues. With its share price down 46.3% in a year and a market value of a mere £55.6bn, BP must hope for recovery in 2021. Meanwhile, its cheap shares pay quarterly cash dividends equating to a dividend yield of 6% a year. That’s a juicy passive income to bank while banking on BP’s bounce-back!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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