There is nothing like getting high returns from dirt-cheap stocks. Which is why I am constantly on the lookout for two kinds of UK stocks. One, those that are trading at low absolute prices or prices far lower than what their fundamentals suggest. And two, those that offer great dividend yields. But even better are stocks that combine both these features. Here are thee such that I could buy for my investment portfolio now.
Rio Tinto: FTSE 100 miner with double-digit dividend yield
The first is FTSE 100 multi-commodity miner Rio Tinto. At 11.2%, its dividend yields is among the highest around today. At the same time its relative price, as measured by the price-to-earnings (P/E) ratio is five times. This is an abysmally low level compared to the average FTSE 100 P/E of around 20 times. It is also lower than that of its mining peers like Anglo American and Evraz, whose P/Es are above seven times.
Rio Tinto has now lost all the progress it made last year as the Chinese government’s stimulus drove up metal prices and the stock market rally of November pushed up its share price to multi-year highs. But I think this combination of high dividend yield and low price makes it a great income stock for me to buy. I reckon that over time its share price could rise, considering its ongoing strong performance. In other words, I could get not just dividend income but also capital gains from holding the stock. I have bought shares for my portfolio.
Direct Line Insurance: high dividend yields, good prospects
Another stock I bought recently is Direct Line Insurance. The FTSE 250 general insurer has a great dividend yield of 8.3%. And while its P/E is not quite as low as that of Rio Tinto, it is still fairly low at 10 times. It is low because its share price trends have been quite weak for some time. This was because performance was challenged and it also underwent restructuring. However, now it is beginning to see a turnaround. I expect that it too could be both a dividend and growth stock for me in the future. That is why I bought it recently.
Taylor Wimpey: strong growth possible
The third stock I like is the FTSE 100 homebuilder Taylor Wimpey. The stock has a decent dividend yield of 5.3%, which is noteworthy considering that over the past five years its yield has averaged 2.6%. I think at the present share price, I get not just good dividends but also the potential for a share price rise. Despite the recent boom in the housing market on supportive policies, its share price has yet to go back to pre-pandemic levels, even though it has recovered a fair bit. Going by its strong order book for 2022, I reckon it will do so soon, though. I would buy the stock.
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Manika Premsingh owns shares of Anglo American, Direct Line Insurance, Evraz and Rio Tinto. 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.
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