There are a few things I look out for when analysing UK stocks. The first one is that I don’t want to overpay. The second is an attractive dividend yield. I’m certainly an income-hungry investor.
So I’ve found two dirt-cheap, high-dividend, UK stocks I’d buy right now. These aren’t tech stocks. But I consider them as steady companies that have the potential to continue generating consistent cash flows to pay out income.
#1 – BATS
The first low-price high-dividend UK stock I’d buy is British American Tobacco (LSE: BATS). The shares trade on a price-to-earnings (P/E) ratio of 8x. So I can’t complain about the valuation.
Tobacco may seem like a boring sector (and one that some would shun on ethical grounds), but the company is clearly doing something right. It upgraded its revenue guidance earlier this month. BATS now expects sales growth of more than 5% in its 2021 financial year. This is ahead of the 3-5% range it provided before.
The growth driver is the New Category division. This includes the “reduced risk” vapour products . BATS is backing this business with full force and is encouraging smokers to convert to such alternatives. So far it has been working well and I reckon this could continue.
The shares have a dividend yield of 7.5%, which is covered by earnings approximately 1.5x. Of course, there’s no guarantee this income will continue to be paid out. But the fact that the dividend is supported by earnings, is encouraging for me.
There are risks with the stock. Regulation is one of them. So far the company has managed to weather regulatory headwinds. But with more focus being placed on health and wellness, I reckon regulation will increase. This could put pressure on the BATS share price.
#2 – Aviva
Aviva (LSE: AV) shares are also trading on a dirt-cheap valuation. The stock has a P/E of 8x and a dividend yield of 6.5%. What’s great is that the income is supported by earnings 2x.
I covered the general insurer earlier this month. I commented on how activist investor Cevian Capital has built a 5% stake in the company. In my opinion, this is a good thing because it means that change is likely to be coming.
In my view, the FTSE 100 company had lost its way. But with the arrival of a new CEO, the firm looks as if it’s getting its mojo back. Aviva is now focusing on its core markets and has already made a series of business disposals.
It has already indicated that it’s going to make a capital return to shareholders from the sale proceeds. For me, a board that puts the interest of shareholders at the forefront is always a good thing.
My concern is whether Aviva’s senior management will find the rate of change expected by Cevian and perhaps some other investors a little too much. In my view, an activist investor doesn’t build a stake for no reason. It expects things to move at a fast pace. The two parties seem to be getting along for now, but this could change and impact the share price.
The stock has an attractive dividend yield, which I can’t ignore. Hence I’d buy Aviva shares today.
