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I’d spend £3k today on these 2 cheap dividend-paying UK shares for a passive income

Peter Stephens
·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

Despite the recent stock market rally, a number of dividend-paying UK shares trade at cheap prices. As such, they could offer a worthwhile passive income at a time when interest rates are at historic lows.

Furthermore, they may deliver impressive capital returns as the FTSE 100 gradually recovers from the 2020 stock market crash.

Here are two examples of such stocks. While they face continued uncertainty in many of their key markets, their valuations suggest they could produce impressive total returns over the coming years.

A generous passive income opportunity relative to cheap UK shares?

The level of passive income offered by Vodafone (LSE: VOD) could make it a relatively attractive dividend option compared to other UK shares. The telecoms business currently has a dividend yield of almost 7%. That’s nearly 50% higher than the FTSE 100’s yield of 4.7%, and suggests the company also offers a wide margin of safety.

Its recent financial performance has been resilient and in line with company expectations. It continues to focus on improving customer loyalty levels. This could increase the size of its economic moat and lead to improving sales and profitability in the long run. It also plans to make further cost savings that could have a direct impact on its capacity to raise dividends in the coming years.

Vodafone’s stock price has fallen by around 18% since the start of the year. In doing so, it’s underperformed many other UK shares. However, its robust financial performance, attractive passive income and sound strategy could mean it delivers sound total returns in the long run relative to other dividend-paying stocks in the FTSE 100.

A cheap FTSE 100 opportunity with a generous yield?

Aviva (LSE: AV) could also offer superior passive income prospects compared to other UK shares. It has a forward dividend yield of nearly 8% for next year. Despite plans to make changes to its dividend policy, this could make it relatively attractive at a time when many FTSE 100 shares have postponed or cancelled theirs. Its high yield also suggests investors may be factoring in a reduction in shareholder payouts at some point in future.

The company’s recent results highlighted the major changes it’s looking to make to strengthen its financial performance. For example, it plans to invest in improving customer service to enhance its competitive position. It will also concentrate resources in markets where it already has a wide economic moat to improve its financial prospects. It also plans to strengthen its balance sheet and cut debt, which could reduce risk at an uncertain time for the economy.

As such, Aviva may offer long-term total return potential relative to other UK shares. Its refreshed strategy and passive income prospects may mean it delivers improving returns over the coming years.

The post I’d spend £3k today on these 2 cheap dividend-paying UK shares for a passive income appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Aviva and Vodafone. 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 2020