Cheap UK dividend shares are a good way for me to be able to get a return from my cash balances. The benefit versus other income-paying investments is that I can target a yield that’s quite high relatively speaking. On the downside, my capital amount is technically at risk, as the share price fluctuates. This means my overall profit could be increased or decreased, irrespective of the dividends I receive.
I see this risk as more of an opportunity, especially if I pick stocks that I think look cheap. So if I had £2,000 to invest right now, here’s how I’d look to get the best of both income and capital gains.
Start with the right priority
To begin with, I need to decide what’s my ultimate aim. Inevitably I need to tilt my thinking either towards income or growth. In this case I’m focusing on income via UK dividend shares. Any capital gain is a bonus, but not a necessity.
This is important because it’s almost impossible to find a stock that’s cheap and could offer large upside, as well as offering an exceptionally high dividend yield. I need to compromise in some way.
Once I’ve established what my priority is, I can then funnel down the number of stocks that fit the bill. How can I do this?
First, I’d look at the dividend yield of FTSE 100 stocks. I’d cut out those that aren’t paying a dividend, and then filter for a dividend yield I’d be happy with. For example, a yield of 4% and above.
Then, to try and find cheap UK dividend shares, I’d look at the price-to-earnings ratio. Although not a perfect gauge of whether a stock is cheap or not, it’s a useful metric to look at. So I might specify the ratio has to be 15 or below.
Allocating funds to cheap UK dividend shares
Applying the two filters should allow me to find where I could be allocating my money. For example, SSE and Aviva are two companies that have yields above 4% and P/E ratios below 15.
There are several others, so what I’d do is pick between three and six stocks in order to invest my £2,000. I want to diversify my risk, and so wouldn’t allocate it all to only a couple of cheap UK dividend shares.
On the flip side, if my filters returned 50 potential companies, I wouldn’t pick them all. I can get the benefit of diversification without needing to invest that many stocks.
Once I’ve invested in my portfolio, I do need to continue to keep an eye on it over time. I’m a long-term investor, but I might need to rebalance my holdings in years to come depending on performance. This could include taking profit if I’ve seen strong share price movement, or selling out if a dividend has been reduced or cut.
Overall, I think my filters for yield and P/E ratio allow me to find good UK dividend shares that look cheap.