If I had £5k to invest in cheap UK shares today, I would focus on blue-chip stocks. While it may be possible to hit a significant savings target such as £1m faster using small-cap stocks, the risk of losing money could significantly increase.
That’s why I tend to stick with blue-chips as these companies can earn an attractive return with reduced risk.
Cheap UK shares
The sort of cheap shares I’d target are companies with strong balance sheets and competitive advantages that are suffering from short-term headwinds. My research shows there are plenty of businesses that fit into this bracket right now.
One great example, I feel, is banking giant Natwest. Investors have been selling the stock this year due to concerns about its exposure to bad loans in the pandemic. However, the lender’s latest trading update showed that these losses are under control. As a result, capital is building up. Analysts believe the group may look to return a large chunk of this capital next year when regulators allow. Natwest could pay out as much as a third of its current market value in dividends if it’s allowed to.
Another company I’d consider adding to a £5k portfolio of cheap UK shares is telecommunications giant BT. This group has some serious problems. Still, after recent declines, the stock is trading at around 50% of its long-term average valuation. To me, that looks too cheap, and while I’m worried about the organisation’s issues, I think the current low share price more than makes up for these problems. As the largest telecommunications business in the UK, the organisation has the financial firepower to drive its turnaround without risking insolvency.
On this topic, I would also be interested in acquiring Vodafone for a portfolio of cheap UK shares. Unlike BT, this company has been able to maintain its dividend throughout the pandemic. The stock currently supports a dividend yield of around 6.5%, which looks extremely attractive in the current interest rate environment.
Dividend income
Talking of dividends, hedge fund operator Man is another blue-chip on my watch list. The goal of this asset management group is to make money in all market environments. It has been quite successful on this front. In the past, Man has produced large returns for its institutional investors. Owners of its publicly traded shares have also benefited. Cash returns have been stable in recent years, and right now, the stock offers a dividend yield of around 5.4%.
Finally, I think one of the best UK shares to own right now is retailer Tesco. This is one of the most defensive stocks listed in London, as its trading performance over the past 12 months shows.
As many other retailers have struggled to survive, Tesco’s profits have jumped. While the company remains the go-to retailer for many consumers, I reckon the firm’s sales and profits will continue to trend higher, and the stock will continue to yield positive returns for shareholders.