I am always looking for dividend shares to buy for my portfolio. I like to concentrate on cheap dividend shares because this builds a margin of safety into my analysis. It also provides scope for capital growth as well as income if market sentiment towards these companies improves.
A portfolio of dividend shares
A great example is GlaxoSmithKline (LSE: GSK). The international pharmaceuticals group is currently trading at a forward price-to-earnings ratio of 13.8. That looks cheap compared to the global pharmaceuticals sector. It also offers a dividend yield of 4.4% at the time of writing.
These metrics alone look attractive. However, the company is also planning to spin off its consumer healthcare business in the near term. Management has said the firm will cut its dividend after the spin-off, which is disappointing, but I think the two organisations will be worth more separately than they are together.
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That is the main reason why I would buy the stock for my portfolio of dividend shares today. Unfortunately, there is no guarantee the spin-off will create value. Glaxo has also struggled to achieve earnings growth in recent years, weighing on the firm’s equity. So, there are plenty of challenges the group may have to overcome.
Steady income
Considering the uncertainties outlined above, I appreciate Glaxo might not be suitable for all investors. Another company I would buy for my portfolio of dividend shares is the insurance group Direct Line (LSE: DLG).
The best income stocks have predictable profits. Companies that sell products or services on a subscription basis are fantastic examples. Direct Line has similar qualities. Consumers tend to renew their insurance policies every year, and car insurance is a legal requirement.
These qualities suggest to me that the company’s profits are predictable. That is why I would buy the stock and its 7.9% dividend yield for my portfolio today. The shares are also selling at an inexpensive looking price-to-earnings (P/E) multiple of 11.5.
One challenge the company may face as we advance is climate change. This could lead to a higher volume of extreme weather-related claims. If claims costs begin to increase rapidly, Direct Line may have no choice but to reduce its distributions to investors.
Undervalued
The final company I would buy for my portfolio of cheap dividend shares is real estate investment trust (REIT) NewRiver (LSE: NRR).
The company, which owns a portfolio of properties in the retail and leisure sectors across the UK, is a recovery play. Commercial property values have plunged over the past 18 months, as landlords have struggled to collect rents. NewRiver’s share price performance since March last year reflects this uncertain environment.
While uncertainty could persist for some time, it is clear that as the UK economy recovers, consumers are returning to the high street. This should have a positive impact on commercial property values.
Despite the improving outlook, shares in NewRiver are still selling at a 50% discount to the firm’s book value. I think this is too cheap. The stock also yields 9%. Considering this level of income and the company’s valuation, I would buy the stock for my portfolio of dividend shares.
