Who doesn’t love a good stock market rally?
Seeing our net worth rise steadily without so much as lifting a finger is a great feeling. But there’s a downside too.
As the stock markets rise, cheap UK shares are less easy to find than they were during the stock market crash. And if dividends become scarce at such times too, like they did last year, it’s a double-whammy.
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The good news, however, is this. If we look hard enough, there are still some gems among Footsie constituent companies that can still be called cheap UK shares. Some even offer high dividend yields.
Here are two of them:
#1. Legal and General: sustainable income gains
The FTSE 100 insurer has a lot going for it. For one, the price-to-earnings (P/E) ratio for Legal & General (LSE: LGEN) is 13 times. I like using the ratio to see how a share’s price compares to other FTSE 100 shares. As per this measure, LGEN is relatively low-priced. Of course, it’s only a bargain if it’s worth buying.
To figure out if there’s any steam in the share price to drive it upward, I like to compare it to its pre-pandemic levels. While LGEN has gained during the stock market rally, it’s still below where it was last year at this time.
LGEN’s financials are also robust. It expects its operating profit for 2020 to be in line with last year’s, which is far more than can be said for many other FTSE 100 companies.
The company also has a pretty meaty dividend yield of almost 7%. And going by its financials, I don’t think there’s much danger of the dividend being cut, either.
The only drawback to the LGEN stock I can see is its share price trend. Its share price hasn’t gone anywhere in the past five years. So if I buy this stock for the next few years, I will bear this risk in mind, even if the price rises in the short term in the stock market rally.
#2. M&G Investments: high dividend yield
Investment manager M&G (LSE: MNG) is another FTSE 100 stock I’d consider. It was hived off into a separate entity from the insurer Prudential recently, and faced the Covid-19 challenge soon after.
Its operating profits for the first half of 2020 were half those in 2019 and assets under management declined. However, a recent reduction in its fees is likely to make M&G more competitive.
Moreover, according to City analysts’ expectations compiled by the Financial Times, there’s almost no downside expected for the stock from its current share price. I think it’s worth underlining that forecasts are subject to change based on evolving company and macro circumstances. Even so, this is a rare share price forecast.
Investors don’t seem to have taken to the stock yet, though. It has a small earnings ratio of 4.5 times. Its weak price trend has clearly bumped up its dividend yield to a huge 9.6%.
I don’t think the stock is without risks, notable among them being performance risk, but the income generated is something to be considered. I’d consider buying it.
