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7.3% dividend yields! I’m thinking of buying these cheap UK shares in an ISA

Royston Wild
·3-min read
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.

UK share investors like me need to be particularly careful when hunting for dividends right now. Firms with defensive or even counter-cyclical operations are particularly attractive buys in this environment of severe macroeconomic stress. Profits at such companies, like utilities, defence contractors, general insurers and healthcare services providers remain stable, or even improve, during tough economic times like these.

It’s also essential to check that the UK shares I buy for income have robust balance sheets. Having significant credit facilities to draw upon and cash on hand is critical in difficult macroeconomic times like this, not just for dividends but perhaps to guarantee their very existence.

6% dividend yields!

Considering all of these points, I would happily stash the cash in electricity generator SSE. This FTSE 100 company’s long-term profits outlook has improved considerably since it sold its retail assets to Ovo Energy earlier this year, a division where customer numbers plummeted in recent years. The move looks particularly prescient as it helps insulate it from a severe spike in bad debts as household budgets come under pressure during the current economic downturn.

SSE can concentrate on the highly-defensive business of electricity generation from here on. But this is not the only reason I like this particular UK share as a dividend investor. It has debt under control and its balance sheet received an extra shot in the arm this week. It sold its 50% holding in two energy-to-waste businesses for a mammoth £995m. One final, and important, thing: SSE’s forward dividend yield comes in at an eye-popping 6.1%.

More big dividends from top UK shares

I think the following two UK shares are particularly-attractive too. Not only do they sport market-beating dividend yields at current prices. They look cheap when I consider forward-looking earnings as well.

  • I already own shares in DS Smith but I’m tempted to buy more following their 26% price drop in 2020. This UK share trades on a forward price-to-earnings (P/E) ratio of 12 times and boasts a chunky 4.3% dividend yield today. That earnings multiple in particular doesn’t reflect this FTSE 100 stock’s various exciting growth drivers. It is a major packaging supplier to e-retailers and is thus well placed to ride the online shopping boom. Its huge investment in recyclables sets it up nicely to ride rocketing demand for ‘greener’ packaging products. And finally, rocketing growth in the ‘retail-ready’ packaging market should light a fire under future profits. Data Bridge Market Research reckons this market will be worth $91.3bn by 2026, up $27bn from 2018 levels.

  • I’m also tempted to load up on Vodafone Group shares today. Sure, this UK share faces a hit to profits from the current macroeconomic cooldown. But I don’t think a 27% share price decline since the start of 2020 is justified. The defensive nature of telecommunications demand means that Vodafone’s bottom line isn’t going to collapse. Furthermore, the FTSE 100 company’s profits outlook over the medium-to-long term looks exceptionally exciting, built upon rocketing data demand in emerging regions. Vodafone carries a gigantic 7.3% dividend yield for the current fiscal year. And it also trades on a bargain-basement forward price-to-earnings growth (PEG) multiple of 0.7.

The post 7.3% dividend yields! I’m thinking of buying these cheap UK shares in an ISA appeared first on The Motley Fool UK.

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Royston Wild owns shares of DS Smith. The Motley Fool UK has recommended DS Smith. 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.

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