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2 cheap UK shares I’d buy now for a second income in 2023

Senior couple crossing the road on a city street. They are walking with shopping bags while Christmas shopping.
Image source: Getty Images

I’ve been digesting the news that UK inflation remains stubbornly high at 10.5%, despite falling for the second month in a row. To keep up with the squeeze on living standards, I’d look to buy more dividend shares that can provide me with a second income this year.

Two FTSE 100 shares I own were handy passive income generators last year. Both companies’ share prices are down on a 12-month basis. Accordingly, I’d expand my positions when I can in order to invest at a bargain rate.

The stocks I’m talking about are Lloyds (LSE:LLOY) and M&G (LSE:MNG).

Lloyds Bank

The Lloyds share price has fallen 8% over the past year. The bank’s dividend yield is 4.36%.

Sticky inflation data puts pressure on the Bank of England to hike interest rates for the 10th consecutive month in a row. This should benefit Lloyds shares, as banking stocks tend to perform well as interest rates rise.

In this environment, Jeffries analysts anticipate the group’s share buybacks will increase 17% and 12% this year and next to a total of £1.8bn each year. If this forecast is correct, the bigger buybacks could lift the share price as fewer shares available on the market typically translates into increased value.

Granted, it’s not all plain sailing for Lloyds. CEO Charlie Nunn recently said UK house prices could decline between 8% to 10% this year. As Britain’s largest mortgage lender, a housing market slump might weigh on Lloyds shares.

Nonetheless, with expanding net interest margins and a price-to-earnings ratio around eight, I think the bank has plenty of upside potential from today’s share price. What’s more, the UK’s chronic housing shortage makes me think any downturn would be short-lived. I’d buy more shares today.

M&G

The M&G share price has fallen by 7% over 12 months. At present, the savings and investment company yields a whopping 9.13%.

It’s been a story of slow progress for this company since its spin-off from Prudential a few years ago. But it doesn’t lack ambition. Hot off the back of £433m in operating capital generation in half-year 2022 (up 40% on the same period last year), the business reaffirmed its £2.5bn target by the end of 2024.

This week, M&G appointed Joseph Pinto as the new CEO of its asset management unit. As the former head of distribution and investment solutions for EMEA, APAC, and LATAM with Natixis Investment Managers, Pinto brings a wealth of experience with him. It will be interesting to see if this leads to improved solutions for clients at M&G.

Admittedly, the business faces risks from a potential recession. A slowdown in growth could threaten the bumper dividend yield. However, no shareholder distributions are risk-free. I’d invest more in this passive income superstar as an important holding in my diversified portfolio.

Aiming for a second income

If I invested £1,000 evenly between both companies, I could expect a second income of £67.45 from my shareholding this year.

As the cost-of-living crisis continues, I’d take every bit of passive income I can get to ease the pressure on my daily expenditure. I think Lloyds and M&G shares are a good place to start. If I had some spare cash, I’d invest more today.

The post 2 cheap UK shares I’d buy now for a second income in 2023 appeared first on The Motley Fool UK.

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Charlie Carman has positions in Lloyds Banking Group Plc and M&g Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Prudential Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023