There’s something inherently more satisfying in buying dirt-cheap UK shares than expensive ones. Doesn’t everybody like a bargain? The risk is that they’re cheap for a reason. I don’t want my portfolio to end up looking shop soiled.
If I had £10,000 at my disposal today, I’d start my hunt on the FTSE 100. There are plenty of dirt-cheap UK blue-chip shares around at the moment, although I’m wary of some of them. As an example, British Airways-owner International Consolidated Airlines Group trades at just 2.8 times earnings. The travel sector could recover if the oil price retreats, but personally, I think there’s further Ukraine war-related turbulence to come. It’s too risky for me.
Here’s where I’d spend my £10k
Barclays trades at 3.8 times earnings and Lloyds Banking Group at 6.1 times, and both would merit a place in my portfolio. Barclays yields 4.2% and Lloyds 4.36%, and I would expect these yields to grow steadily over time.
Both these UK shares may look very cheap, but they’ve consistently failed to deliver share price growth. Customer defaults could rise as the cost of living crisis worsens, but I would aim to hold them for the long, long term so I can look beyond short-term setbacks. In the meantime, I’d let my dividends roll up.
I would also go fishing for cheap UK shares in the mining sector. Despite the commodity boom, valuations are in single-digits, as measured by the price-to-earnings ratio (P/E). Anglo American, for example, trades at just 5.8 times earnings, while Rio Tinto is even cheaper at 5.1 times.
The Anglo American share price suffered a flash crash last week after production figures disappointed, but I would see this as a buying opportunity. The risk is that commodity prices have become overstretched. Note how the copper price has dropped on falling Chinese demand as Covid lockdowns hit the country’s economy. But I’d take that chance in return for yields of 6.92% (Anglo American), and 11.17% (Rio Tinto).
Both these dirt-cheap UK shares could give my portfolio a bumpy ride, but I’m investing for a minimum of 10 years, and ideally longer.
I also favour the housebuilding sector and I’m pleased to see Barratt Developments and Persimmon looking good value at 7.8 and 8.8 times earnings respectively.
Some more shares I’d consider
As well as being very cheap, these two UK shares are top dividend payers. They yield 5.79% and 10.78% respectively. Higher interest rates could sink the housing market, but mortgage rates are still historically cheap, and property supply is low. I believe that will sustain homebuyer demand.
There are many more really cheap UK shares on the FTSE 100. I would like to take a closer look at broadcaster ITV (4.8 times earnings), tobacco giant Imperial Brands (6.6 times) and Taylor Wimpey (7.2 times).
The danger is that what looks like good value ends up being a trap. Further research is required on my part. Yet if I had £10k to invest in dirt-cheap UK shares today, this is where I’d start my hunt.