Having been investing in stocks and shares since 1986-87, my attitude to risk has changed considerably over time. In my early years, I took big, bold bets that often turned to trash. These days, and 35 years later, I aim to get rich slowly by buying quality stocks and holding them for years. Over the past 18 months, I’ve been bargain hunting in the FTSE 100 index, which I regard as among the world’s cheapest markets. Here are three cheap UK shares I’d happily buy today for their bumper earnings and generous cash dividends.
1. FTSE 100 share #1: Rio Tinto
Global mining giant Rio Tinto (LSE: RIO) is making incredible profits this year, thanks to soaring metals prices. As a result, this FTSE 100 share has nearly doubled from its March 2020 low of 3,212p. As I write, Rio stock trades at 6,280p — more than £5 below its 52-week high of 6,788p hit on 10 May 2021. What I like about Rio are its huge cash flows, earnings, and dividends. At present, Rio shares trade on a price-to-earnings ratio of 7.4 and an earnings yield of 13.5%. This cheap UK share offers a dividend yield of 8.1% a year (excluding special dividends). I don’t own Rio stock, despite it being among the cheapest in the FTSE 100. Also, mining shares are notoriously volatile, plus this market may be near peaking. Hence, I would buy Rio today, but with caution.
2. Dividend share #2: BAT
My next ‘smoking’ share is exactly that: British American Tobacco (LSE: BATS). For me, BAT shares are cheap because this business is unloved and unwanted in this age of socially and environmentally conscious investing. But, like Rio, this FTSE 100 firm generates huge profits, cash flows, and earnings to funnel back to shareholders. In the first half of 2021, BAT’s grew revenues by 8.1%, operating profit by 5.4% and its dividend by 4.1%. At the current share price of 2,699p, BAT is valued at £62bn, making it a Footsie heavyweight. Its shares trade on a price-to-earnings ratio of 10.1 and an earnings yield of 9.9%. The stock offers a dividend yield of 8.0% a year (more than double the FTSE 100’s forecast yield of 3.7%). As a smoker myself, I know smoking is a deadly habit that will eventually die out. However, as an income-seeking value investor, I’d happily buy BAT at current price levels.
3. Cheap share #3: M&G
My final FTSE 100 company doesn’t damage the environment or smokers’ lungs. It is British investment firm M&G (LSE: MNG), once part of the mighty ‘Pru’ until its demerger in October 2019. Of these three income-generating stocks, M&G is probably the safest, most solid, and even boring business. On 1 June this year, M&G shares hit a 52-week high of 254.3p, but have since dropped to 231.2p as I write. This values the asset manager at £5.9bn, a mere minnow compared to its global rivals. Right now, M&G shares trade on a price-to-earnings ratio of 5.1 (among the lowest in the entire FTSE 100) and an earnings yield of 19.5%. These shares also pay a dividend yield of 8.1% a year, in line with BAT and Rio. I don’t own M&G shares, but I’d buy at the current price. And that’s even though I know the group faces intense, ongoing competition from bigger, fiercer challengers!
