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2 dirt-cheap FTSE 100 shares I bought for dividends

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Last week, I mentioned that I’ve written few articles for this website recently. That’s because I’ve been busily buying FTSE 100 shares that I consider to be cheap. Predictably, after buying these value stocks, they continued falling — something that seems to happen often in my world.

Is this a summer slump or something worse?

I can’t say whether recent weakness in UK share prices is merely the usual summer lull or the beginning of a much steeper decline. That said, here’s how the FTSE 100 has performed over six recent timescales:

One day -1.6%
Five days -2.1%
One month -3.2%
Year to date -4.7%
Six months -7.5%
One year +0.4%

As you can see, the Footsie has fallen over five of the periods, losing 7.5% of its value in 2022 so far. (All figures exclude cash dividends.) Again, I’ve no idea whether these falls will continue, level out or reverse. Nevertheless, I’ve bitten the bullet again by buying into two more companies whose share prices look attractive to me.

Inflation is eating our cash

While watching recent market wobbles, my wife and have a large sum in cash to invest. The problem is that inflation is rapidly eroding the value of this nest egg. Indeed, UK inflation — as measured by the Consumer Prices Index (CPI) — hit 9.1% for the 12 months to May 2022. That’s a 40-year high. Yikes.

What’s more, CPI inflation is expected to peak above 11% this year, driven by the soaring costs of housing, fuel, energy and food. In other words, if we do nothing with our cash pile, then its value will continue to erode — and fast. So that’s driven us to buy more shares this month.

We’ve bought another two cheap FTSE 100 shares

Hence, my wife — who administers our money — bought another two cheap shares last week. As before, we picked these from the FTSE 100, which includes the UK’s largest listed companies. Here are the current fundamentals of our two new stocks:

Company Barclays Legal & General
Industry Banks Insurance/
Asset management
Share price 145.5p 239.4p
52-week low 140.1p 225.5p
52-week high 219.6p 309.9p
12-month change -14.7% -8.9%
Market value £24.5bn £14.3bn
Price/earnings ratio 4.3 7.4
Earnings yield 23.5% 13.6%
Dividend yield 4.0% 7.4%
Dividend cover 5.8 1.8
Share prices as of market close on 14 July 2022

Here’s our rationale for buying these two stocks. We bought Barclays because its shares trade on a trailing price-to-earnings ratio of under 4.3, one of the lowest in the FTSE 100. This translates into an earnings yield nearing 24%, which covers the bank’s dividend yield of 4% a year by almost six times. Thus, even if Barclays’ future earnings take a beating, I see its current dividend as practically rock-solid. It’s also slightly above the sub-4% yearly cash yield of the wider FTSE 100.

As for Legal & General, the insurer and asset manager’s shares offer an even higher dividend yield of 7.4% a year — almost twice that of the FTSE 100. Although dividend cover for this stock is much lower at 1.8 times, I still view this cash yield as sustainable for now.

In summary, we bought these two shares because they look cheap right now. And that’s despite my worries about rising interest rates, red-hot inflation, recession risk, and war in Ukraine!

The post 2 dirt-cheap FTSE 100 shares I bought for dividends appeared first on The Motley Fool UK.

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Cliff D’Arcy has an economic interest in Barclays and Legal & General. The Motley Fool UK has recommended Barclays. 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.