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The FTSE 100 index has risen an encouraging 4% so far in the second quarter. The London stock market is back in fashion thanks to buzz over new potential IPOs (such as those of Shein and Monzo), and hopes over interest rate cuts.
Yet years of underperformance mean many first-class Footsie shares still trade at bargain-basement levels.
I’m currently looking for cheap shares that could make me a healthy four-figure dividend income this year. The following two have grabbed my attention.
| Company | Forward P/E ratio | Forward dividend yield |
|---|---|---|
| Vodafone Group (LSE:VOD) | 10.8 times | 7.2% |
| National Grid (LSE:NG.) | 12.7 times | 5.7% |
As you can see, both shares carry a forward dividend yield well above the 3.5% average for FTSE 100 shares. They also deal on rock-bottom price-to-earnings (P/E) ratios.
If dividend estimates are right, a £20,000 lump sum investment invested equally across both shares today will net me a £1,300 passive income over the next year.
While they’re not without risk, here’s why I’d buy them for my portfolio this June.
Talking dividends
Telecoms firms like Vodafone have to overcome significant competitive pressures to make a profit. But the long-term growth potential for these businesses is terrific, such is the rapid pace at which our lives are becoming increasingly digitalised.
This Footsie company has disappointed many investors in 2024 with plans to rebase its dividend. However, the expected payout for this year still carries a giant 7%-plus dividend yield.
I’m confident that dividends on Vodafone shares will grow again over time, too. I’m encouraged by steps to cut costs and re-focus on outperforming areas like Vodafone Business, giving it a chance to turbocharge its already-formidable cash flows.
Its massive footprint in Africa might also drive earnings skywards, as data and mobile money services demand booms.
More big dividends
National Grid’s also been in the news recently on news of a dividend rebasement. In this case, payouts will be reset in response to a £7bn rights issue.
The placing will help the power transmission business meet its growth plans, it says, through a £60bn network investment over the next five years. The transition to greener energy sources provides an enormous opportunity for power companies to grow profits, and National Grid is taking bold steps to exploit this.
As you can see, the company’s operations are colossally expensive. And this poses a constant danger to earnings and dividends. But on balance, I think the long-term benefits of owning this share are huge.
One final thing to note. Recent share price weakness leaves National Grid shares trading on a forward P/E ratio just above 12 times.
While this is above the Footsie average of 11 times, it is below the company’s historical average north of 16 times. I think today represents an attractive opportunity to buy its shares.
