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Why I’d buy dirt-cheap UK dividend shares in this stock market recovery

Peter Stephens
·3-min read

Despite a stock market recovery having taken place since the 2020 market crash, a number of UK dividend shares continue to trade at low prices.

This could suggest that they offer the prospect of capital gains over the long run in a rising stock market. They may also deliver an attractive passive income that becomes increasingly in demand in a low interest rate environment.

As such, rather than focusing solely on growth stocks as many investors have done of late, cheap dividend stocks could be relatively appealing, I feel.

UK dividend shares trading at cheap prices

Of course, some UK dividend shares may be trading at cheap prices because of challenges they are encountering. For example, they may be struggling to adapt to industry changes. Or, they have weak financial prospects during what is an uncertain period for the wider economy. As such, it is important to always analyse a company’s risks prior to purchasing it to identify whether it offers good value for money at a specific price level.

However, in some cases, high-quality income shares are trading at cheap prices even after the recent stock market recovery. They could offer greater scope for capital gains in the coming years. Although a new record high for the stock market is never guaranteed, history suggests that many UK stocks can offer attractive long-term growth prospects. Buying those companies that offer the lowest prices and the widest margins of safety may mean greater scope for capital appreciation than higher-priced, popular companies such as growth stocks.

A passive income in a stock market recovery

Although a stock market recovery could mean that interest rates rise, it seems plausible that assets such as cash and bonds will fail to offer a worthwhile passive income for a prolonged period of time. As such, UK dividend shares could remain appealing from an income perspective over the coming years. This may mean that demand for them increases, as many income investors seek to maximise their passive income on a limited amount of capital.

The result of rising demand for cheap income stocks could be to push their yields lower and prices higher. This may result in more impressive total returns for existing investors. Furthermore, a likely economic recovery in the coming years could mean that their scope for dividend growth improves. Although this situation is not guaranteed, the economy has always bounced back from its previous challenges. Therefore, history suggests that dividend growth is likely to return in the long run.

The appeal of growth stocks

Of course, companies offering high earnings growth rates have been very popular in recent months. However, this may have increased their valuations to levels that suggest they lack scope for further capital growth. By contrast, many cheap UK dividend shares could be undervalued at the present time. Alongside their dividend prospects, this may mean they can offer relatively high total returns in the long run.

The post Why I’d buy dirt-cheap UK dividend shares in this stock market recovery appeared first on The Motley Fool UK.

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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