After a difficult first quarter for global stock markets, April has got off to a steadier start. The US S&P 500 index has lost just over 0.9% since the start of the month. Meanwhile, the UK FTSE 100 index has actually gained 2.1% in April so far. In short, things have calmed down after the instability and oscillations caused by Russia invading Ukraine on 24 February. As a result, I’m on the lookout again for cheap dividend shares — UK stocks paying generous passive income to patient investors.
Hence, here are five UK dividend shares that all offer market-beating cash yields to shareholders. I don’t own any of these cheap shares as yet, but I’d buy all five to add extra passive income to my family portfolio.
Five fabulous FTSE 100 dividend shares
The five Footsie stocks below offer some of the highest dividend yields in the UK’s blue-chip index. I see these five stocks as providing two things to my portfolio. First, these dividend shares would give a welcome boost to my passive income. Second, I could also reinvest these dividends to buy yet more shares, lifting my long-term capital gains.
| Company | Sector | Share price (p) | Market value (£bn) | P/E | Earnings yield | Dividend yield | Dividend cover |
| Rio Tinto | Mining | 6,131.00 | 102.1 | 6.2 | 16.2% | 9.4% | 1.7 |
| Persimmon | Housebuilding | 2,171.84 | 6.9 | 8.8 | 11.3% | 10.8% | 1.1 |
| Imperial Brands | Tobacco | 1,664.81 | 15.8 | 5.6 | 18.0% | 8.3% | 2.2 |
| M&G | Investment | 212.33 | 5.5 | 65.9 | 1.5% | 8.6% | 0.2 |
| Phoenix Group Holdings | Insurance | 629.8 | 6.3 | – | – | 7.8% | – |
The first thing to note about this mini-portfolio of dividend shares is that its individual cash yields range from 7.8% to 10.8% a year. This is well ahead of the FTSE 100’s cash yield of around 4% a year. Second, the average dividend across all five shares is a whopping 9% a year. That’s a huge passive income in this age of near-zero interest rates.
Dividends are not guaranteed
Then again, experience has taught me two important lessons. First, that share dividends are not guaranteed, so they can be cut or cancelled at any time. Second, it’s important to diversify my dividend income, so as not to rely too heavily on one company, sector or industry for cash payments. For example, a properly diversified income portfolio with, say, 25 or more different dividend shares would not be over-reliant on any one company’s payments.
Another thing I’d note is that dividend cover at two of these dividend shares is below one. In other words, the company’s latest earnings did not cover its cash payout. This happened at investment manager M&G and insurance consolidator Phoenix Group Holdings. Then again, both firms’ earnings are expected to rebound this year — enough to comfortably cover their dividends.
Conversely, earnings yields at miner Rio Tinto and cigarette maker Imperial Brands are so high that they cover their dividend pay-outs by 1.7 and 2.2 times respectively. In other words, these two dividend shares could raise their cash payouts substantially, yet still have these covered by current earnings.
Finally, my family portfolio is very exposed to US and global stocks, but has less exposure to UK shares. Thus, adding some (or all five) of these dividend shares to the portfolio would help to spread my risk even wider. That’s sounds like good news to me!