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My Santa Claus portfolio of cheap shares for 2021: one naughty and one nice!

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At the end of each year, I often construct a ‘Santa Claus’ portfolio of cheap shares. This portfolio aims to help Father Christmas fund the astronomical cost of providing Christmas presents for all good children.

I assume Saint Nicholas is immortal and, as he works only one night a year, has needs similar to those of pensioners. Therefore, I pick only cheap stocks that pay solid cash dividends, because Santa needs income. And what dividends he doesn’t spend (for example, during naughty years), Mrs Claus reinvests into yet more shares.

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Two cheap shares for Santa Claus

Here’s my list of two cheap shares — one naughty and the other nice — to help Santa stay solvent. I chose only from the UK’s 10 biggest dividend payers. I’ll start with the naughty stock.

Naughty share: BATS

It’s obvious why I class British American Tobacco (LSE: BATS) as a naughty share. BATS is the world’s second-largest cigarette manufacturer, making hundreds of billions of ciggies a year. But BATS is a British institution that has been around since 1902. Indeed, it’s been a stalwart of the FTSE 100 since the Footsie’s earliest days. Sure, BATS is a ‘sin stock’, but at the current price of £27, this global heavyweight is valued at £61.9bn. What’s more, BATS pays the second-largest UK dividend by size, with its cheap shares underpinning many income-seeking portfolios.

As a global leader in its industry with 55,000 employees, BATS generates big numbers. In 2019, revenue was £25.8bn and net income was £5.8bn. Also, cigarette sales have held up and even risen slightly in 2020. Yet the BATS share price is £8 below the £35 hit in mid-January. Right now, BATS shares offer a dividend yield of 7.8%, almost 2.5 times the 3.2% on offer from the wider FTSE 100. That’s the primary reason why this naughty share goes straight into Santa’s sack, despite some ethical considerations.

Nice share: GlaxoSmithKline

Having been a shareholder in GlaxoSmithKline (LSE: GSK) for most of the past 30 years, I know this pharmaceutical giant very well. Indeed, two of my close relatives worked at the UK’s #2 drug firm for most of their adult lives. Hence, I’ve been very disappointed with the weak performance of these cheap shares this year.

After a positive start to 2020, GSK shares have had a grim year. Ending 2019 at 1,779p, they hit their 52-week closing high of 1,846p on 17 January. After bouncing back from the March market meltdown, this rebound ran out in early May. Since then, it’s been pretty much all downhill, with GSK hitting a 2020 low of 1,284p on 30 October. As I write, the share price stands at 1,344p, up a mere 60p (4.7%) from its pre-Halloween low.

Thus, GSK has missed out on the vaccine-driven market rally that sent many cheap shares surging in value. As a result, GSK is #83 in the FTSE 100’s performance table over the past year. Despite this setback, I’m expecting better returns from this lowly rated stock in 2020. In historical terms, GSK shares are cheap as chips. They trade on a price-to-earnings ratio of 10.7% and an earnings yield of 9.3%. The solid, steady 80p-a-share cash dividend equates to a dividend yield of 6% a year. That’s why I’ll keep reinvesting my GSK dividends into more shares. It’s also why Santa is happy to add this nice share to his income portfolio!

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Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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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