I like to own a number of income stocks in my portfolio. As such, I am always on the lookout for cheap UK dividend shares to buy.
Here are three companies that have recently attracted my attention.
UK dividend shares
The first company on my list is the supermarket retailer Tesco (LSE: TSCO). This stock has a dividend yield of 4.1% at the time of writing.
What I like about this company as an investment is the fact that consumers will always need food and drink. Usually, Tesco is there to supply this.
In my view, this means the firm has some highly desirable and defensive qualities. Its size also means it has robust economies of scale, giving the company scope to achieve attractive profit margins in the relatively low margin business of grocery retailing. I think these two qualities will help support the payout.
Still, I am not going to take Tesco’s growth for granted. As we advance, the company may face some significant challenges, including higher wage and operational costs, which could eat into its profit margins.
I would buy the stock for my portfolio of UK dividend shares for its 4.1% dividend yield while keeping an eye on the above risk factors.
Financial services provider CMC Markets (LSE: CMCX) is an underappreciated income investment, in my opinion. With a dividend yield of 7.5% at the time of writing, the stock offers one of the highest dividend yields in the FTSE All-Share today.
The company has benefited recently from a surge in trading activity on its platforms. This has helped the group rake in the cash, most of which it is now returning to investors.
I do not think this trend will continue. However, the company has always returned significant sums to shareholders with dividends. So, while I do believe CMC’s dividend yield could fall in the next few years, I reckon it will remain an income champion. That is why I would buy the stock for my portfolio of UK dividend shares.
Other risks that may force management to curb the payout include additional regulations and higher costs, both of which could hurt cash generation.
One of the top dividend shares in the FTSE 100 is M&G (LSE: MNG). At the time of writing, shares in this asset management group support a dividend yield of 8.6%.
I would buy this income stock because it is currently in the middle of a growth spurt. M&G has been acquiring smaller asset managers and financial advisors to increase its footprint and diversify its offering.
It recently acquired Sandringham Financial Partners, bringing with it £2.5bn of assets under management and 10,000 individual clients. This was not the first, nor will it be the last, of these transactions.
Still, while I think these deals are encouraging, I am also wary that by expanding too fast, M&G may end up losing its way. This is the most considerable challenge management faces right now. If the company grows too quickly, new customers could become disenfranchised, and growth may slow.
Even after taking that challenge into account, I would buy the firm for my portfolio of UK dividend shares.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.