I’m always looking for dirt-cheap UK shares to buy for my portfolio with high dividend yields. These bargains often make for fantastic investments if the underlying business is strong with a consistent track record over the years.
One quick and dirty way to measure the cheapness of a stock is by looking at its price-to-earnings (P/E) ratio. The P/E ratio compares the price of a share relative to its earnings per share. Usually, a high P/E ratio is deemed expensive, while a low price earning ratio suggests a stock is cheap. For reference, the market average currently sits around 15.
With that in mind, I’ve spotted two UK shares that look way too cheap, in my opinion. Let’s explore.
A leading mining company
Rio Tinto (LSE:RIO) is focused on the exploration, mining and processing of mineral resources. The company’s portfolio consists of a wide range of commodities. It includes iron ore, aluminium, copper, diamonds, and even energy-related materials.
At a P/E ratio of 5.45, this top UK share to buy is a steal. This, in my opinion, makes Rio Tinto an attractive bargain for value investors. Combining that with a whopping 10.98% dividend yield makes me think it could be one of the best stocks to buy for passive income investors.
But can this dividend be sustained? In my opinion, yes. The company paid out 60% of its profit as dividends last year. In my experience, that’s a healthy payout ratio and leaves plenty of capital for management to reinvest in future projects.
However, here are my concerns for Rio Tinto. The company is heavily dependent on iron ore sales. Therefore, a drop in iron ore prices could significantly affect the company’s profits. That actually happened recently as there was less demand from China.
Having said that, Rio Tinto remains one of my top UK shares to buy, as I think it can continue to generate a decent passive income over the long term.
Another top UK share to buy with high dividends
In my mind, BHP Group (LSE:BHP) is another attractive UK share to buy with a dividend yield over 10% and a price to earnings ratio of 12.92. BHP extracts metals from the ground in a similar fashion to Rio Tinto. But the portfolio of assets differs slightly. And it consists of iron ore, copper, nickel, metallurgical coal, potash and petroleum.
While there are competitors in this space, BHP is one of the market leaders. In its 2021 fiscal year, which ended in June, the company paid $15.2bn as dividends to its shareholders. And given operating profits jumped from $14.4bn to $25.9bn since June 2020, I think it’s fair to say that this dividend is backed by growth.
However, just like Rio Tinto, BHP is also at the mercy of fluctuating commodity prices. If the demand for certain metals falls, the price will do the same. And since the mining industry is riddled with fixed costs, this could significantly hurt profit margins and, in turn, dividends.
Final thoughts on these UK shares to buy now
A passive income stock has to remain profitable to pay dividends continuously over the long term. And generally, only financially stable businesses can afford to do that. In my opinion, Rio Tinto and BHP both meet these criteria despite their caveats. And that’s why they are both on my top UK shares to buy list. But they aren’t the only ones.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
