I have shifted my focus from growth stocks to dividend shares, as there are so many tempting opportunities out there right now. The FTSE 100 is packed with top companies trading at low valuations and offering dizzying yields.
There are so many great UK dividend shares going cheap that if I named them all, this article would turn into a list. The following three have caught my attention. I’m not buying them today (I’m buying Rolls-Royce next) but I’m sticking them on my watchlist.
Asset manager Schroders now yields 6.8%, the highest I have seen. Its stock is also cheaper than I can remember, trading at just 7.3 times earnings. Unsurprisingly, given those numbers, the share price has tanked. It is down 38% over one year and 40% over five.
These three tempt me
Fund managers act as a geared play on market sentiment, so Schroders has been hammered by the wider sell-off. Yet its own results are solid, despite the carnage.
While pre-tax profits dropped 16% to £313m, operating profit rose 2% to £406.9m. Importantly, assets under management (AUM) grew 1% to £773bn. AUM have no doubt fallen since, but this shows resilience and with luck they should rebound when markets finally recover.
The housebuilding sector has been ravaged by rising interest rates, with the sell-off intensifying due to the recent gilt crisis. This has left Taylor Wimpey yielding 9.93%, and trading it just 4.8 times earnings. Its share price is down 42% in a year and 56% over five years.
Buying a housebuilder today is risky. A property market crash now looks inevitable, as mortgage costs rise. Taylor Wimpey could cut its dividend if things get bad. Again, this is risky, but much of that is reflected in today’s low valuation. Plus it has healthy cash reserves.
Vodafone Group has been one of my favourite dividend shares for years but I can’t remember a time when it yielded 7.96%, as it does today. It’s also cheap, trading at just 10.1 times earnings. Vodafone’s stock is down 10% over 12 months and 55% over five years.
The £27.33 telecoms giant has a wide global reach and will benefit as the falling pound boosts the value of its overseas revenues. However, it also carries €59.7b in debt, and this will become more of a burden as interest rates rise. Management might decide the high yield is an opportunity to cut the dividend.
These FTSE 100 stocks are risky but may reward
All of these stocks have fallen over the last five turbulent years, which has seen the pandemic, war, energy shock and rising interest rates. We live in a time of upheavals, but history shows that these are often the best time to invest in shares — for those who can take a long-term view. I’m building up my ammunition and will consider these and other FTSE 100 shares when I’ve got the cash.
Today’s problems aren’t going to be solved easily but any investor who waits for blue skies before parting with their money will never invest. I’m investing with a 20-year view, and today’s cheap valuations and high yields are too tempting to resist. Things have to get better at some point.