At this time of year, UK investors rush to fill their Stocks and Shares ISAs before the end of the tax year on 5 April. The 2022-23 tax year begins next Wednesday, 6 April, so this is often the busiest time of year for stockbrokers. It’s also a time when share prices often enjoy positive bumps, as investors pop cheap shares into tax shelters. With this in mind, here are five cheap shares I don’t own but would buy today and hold for their cash dividends (and future capital gains).
Five cheap shares from the FTSE 100
I often trawl the FTSE 100 index looking for cheap shares among the UK’s largest listed companies. Ideally, I’m searching for solid, boring, and stable companies with lowly rated shares that offer high dividend yields. These five low-priced Footsie stocks fit my bill today:
| Company | Sector | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield |
| Rio Tinto | Mining | 6,103.00 | 102.3 | 6.2 | 16.2% | 9.5% |
| British American Tobacco | Tobacco | 3,200.50 | 73.1 | 11.1 | 9.0% | 6.8% |
| Imperial Brands | Tobacco | 1,607.00 | 15.3 | 5.4 | 18.6% | 8.6% |
| M&G | Financials | 222.70 | 5.8 | 10.0 | 10.0% | 8.2% |
| Phoenix Group Holdings | Financials | 614.60 | 6.1 | – | – | 8.0% |
The first point I’d make about these five cheap shares is this is not a portfolio. First, it’s far too concentrated, consisting of just five stocks. Second, it’s highly focused, with two tobacco shares and two financial stocks. Third, it is designed to maximise dividend income and therefore lacks the growth stocks that can produce outstanding capital gains for investors. Fourth, with two tobacco firms and a mining company, this mini-portfolio is unlikely to appeal to environmental, social, and governance (ESG) investors.
Dividend dynamos
Nevertheless, as an income-seeking investor, I like the look of these five cheap shares for their market-beating dividends. The highest dividend yield — 9.5% a year — comes from Rio Tinto, a £102bn Goliath of the Footsie that paid the UK’s largest dividend by size for 2021. The remaining four dividend yields range from 8.6% a year at tobacco company Imperial Brands, to 6.8% a year at fellow cigarette maker British American Tobacco.
If I were to invest £1,000 into each of these five shares, my total investment of £5,000 would produce cash dividends of over £410 a year. In other words, the average dividend from these five cheap shares is 8.2% a year. That’s more than twice the cash yield of the wider FTSE 100 index. It’s this bumper passive income that makes these five dividend stocks appealing to me.
Now for the downsides
Of course, I would never put my life savings into just these five cheap shares. Why? First, long experience has taught me that mining shares (and their dividends) can be very volatile. Second, dividends are not guaranteed, so they can be reduced or withdrawn at any time. For example, Rio Tinto cut its dividend in 2016, while Imperial Brands reduced its cash payout in 2020. In addition, Phoenix Group Holdings reduced its dividend in 2016 and 2018.
Then again, dividends from solid businesses tend to rise over time. For example, Imperial’s dividend grew at a 6.6% compound annual growth rate in the 10 years to 2021. That’s why I love to buy and hold cheap shares paying good dividends — then spend or reinvest this cash as I see fit!