Since the end of 2021, the UK FTSE 100 index has fallen just under 1%. To me, that’s a pretty good return, given a European war broke out last week. Meanwhile, on the other side of the Atlantic, the US S&P 500 index has lost 8% of its value in 2022. And the tech-heavy Nasdaq Composite index has dropped by 12.8% this year. Right now, US stocks still look pricey to me in historical terms. However, I see plenty of cheap shares in the Footsie that I would like to own. Here are five low-priced stocks I don’t own but that are on my watchlist.
Five cheap shares in the FTSE 100
For several months, my family portfolio has been building up a cash pile to invest in cheap shares. While we don’t have a firm time scale for investing this (now literal) war chest, we have a long list of attractively priced stocks to buy. For a safety-first approach, almost all of these shares are FTSE stocks. What we’re looking for are solid, well-known businesses with high earnings yields that pay generous cash dividends to shareholders.
Here are five cheap shares that meet this bill for me today, sorted by their dividend yields:
| Company | Sector | Share price (p) | Market value (£bn) | PER | Earnings yield | Dividend yield |
| British American Tobacco | Tobacco | 3,167.00 | 72.6 | 10.8 | 9.2% | 10.3% |
| M&G | Financials | 191.3 | 5.0 | 81.7 | 1.2% | 9.6% |
| Rio Tinto | Mining | 6,155.00 | 101.8 | 6.4 | 15.7% | 9.4% |
| Imperial Brands | Tobacco | 1,591.50 | 15.2 | 5.3 | 18.8% | 8.7% |
| Legal & General Group | Financials | 258.9 | 15.6 | 6.8 | 14.6% | 6.9% |
This is not a complete portfolio
The first thing I’ll point out is that this is not a portfolio in and of itself. I would never build an entire portfolio around just five shares, no matter how cheap they appear. What’s more, this mini-portfolio is highly concentrated and, therefore, not diversified enough. It includes shares in two tobacco businesses and the stocks of two asset managers. Thus, even for a five-share mini-portfolio, it’s far too condensed for me.
Second, I’ve had my eye on these five cheap shares for a reason. In these troubled times, I’m looking for stocks that pay market-beating cash dividends. By reinvesting these pay-outs, I can partly mitigate and reduce my capital losses if Mr Market decides to have another meltdown. The average dividend yield for these five shares is 9% a year — a useful offset against future market falls.
Third, each of these five firms is fairly big in its own right. The largest is a Goliath valued at almost £102bn, while even the smallest weighs in at £5bn. Thus, each of these cheap shares is highly liquid and, therefore, easy to trade in large volumes.
Fourth, all five companies have long and storied histories in their fields. Also, they are household names with easily understood business models. In short, they are exactly the kind of dull but durable businesses that I like to own. Hence, we aim to buy some of these stocks in the coming days, taking advantage of any market weakness along the way.
Finally, one important caveat: company dividends are not guaranteed. They can be cut or cancelled at any time, as happened during the market meltdown of spring 2020. That’s why my family portfolio is widely diversified to keep this passive income rolling in!