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How I’d invest £5k in cheap UK dividend shares

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I believe investing in cheap UK dividend shares is one of the best ways to boost my income. At the moment, some companies on the market offer dividend yields as high as 8%. This looks incredibly attractive, compared to most savings accounts.

However, dividend shares should never be used as a substitute for savings accounts. Dividend distributions are paid out of company profits. Therefore, they’re never guaranteed.

If a firm’s profits suddenly take a turn for the worst, management may have no choice but to cut the firm’s dividend. Indeed, the market was subject to widespread dividend cuts last year when corporate profits plunged during the pandemic.

As such, this strategy may not be suitable for all investors. Still, I’m comfortable with the level of risk involved in buying cheap UK dividend shares. If I had a lump sum of £5,000 to invest today, I’d buy a basket of companies to achieve this aim.

A basket of stocks

One of the best dividend shares on the market at the moment, in my opinion, is British American Tobacco (LSE: BATS). Ethical considerations aside, this company is extremely attractive as an income investment.

The stock currently offers a dividend yield of around 8%. It also trades at a price-to-earnings (P/E) multiple of about 8. Compared to the market average of approximately 16, that looks cheap to me.

What’s more, the company recently increased its sales forecast for the year. British American now expects to generate revenue growth of “above 5%” for the year. Previous forecasts called for growth in the region of 3-5%.

The company is benefiting from higher sales of its so-called reduced-risk tobacco products, which consumers are purchasing in increasing numbers.

With sales set to expand by a mid-single-digit percentage this year, I think the outlook for the company and its dividend is exciting. That’s why I’d include it in my portfolio of cheap UK dividend shares.

Having said all of the above, one significant risk hanging over the stock is the company’s debt. Management expects net debt to reduce to three times adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) by the end of the current financial year. That’s a bit high for my liking. I tend to avoid shares with a net debt to EBITDA ratio of more than two.

Cheap UK dividend shares

The other company I’d buy for my basket of income stocks is Aviva (LSE: AV). At the time of writing, the stock trades at a P/E of 7.7. It also offers a dividend yield of 5.6%.

I’m encouraged by the insurance group’s recent efforts to refocus the business. It’s sold off overseas divisions and is focusing on building its operations here in the UK.

While it’s still early days, I think this could lead to a renewed growth spurt at the corporation over the next few years. It’s this potential, coupled with the stock’s dividend yield, that makes me want to buy Aviva for my portfolio right now.

Of course, if the turnaround programme doesn’t yield the desired results, the company’s growth could collapse. In this scenario, Aviva’s profits may slump, and its dividend could come under pressure.

The post How I’d invest £5k in cheap UK dividend shares appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. 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 2021

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