Guess which cheap dividend share I bought for passive income?

pensive bearded business man sitting on chair looking out of the window

Since the end of June, my wife and I have been on a buying spree, aggressively purchasing cheap shares in quality businesses. As older shareholders (both 54), we’ve concentrated on buying modestly priced stocks that offer generous dividend yields. In the past four weeks, we’ve created a mini-portfolio of dividend shares. We intend to hold these stocks over the long term for extra passive income.

We’ve bought 10 new dividend shares

Using the proceeds from a large share disposal, plus regular cash dividends, we’ve finished the first of up to three new standalone mini-portfolios. We invested the same amount in all 10 dividend shares, creating a balanced and partly diversified portfolio. I’d like to diversify even further, but my wife dislikes the idea of owning, for example, tobacco stocks.

Perhaps we should have started this process several months ago, but I waited to see if the usual summer lull in share prices happened this year. Also, the latest figure for UK inflation pushed me into action. Consumer Prices Index (CPI) inflation soared to 9.4% in the 12 months to June, up from 9.1% in May. This means that the cost of living is rising at its fastest rate since February 1982. Way back then, I was only 13 and just settling into boarding school. Now I’m an old geezer. Blimey.

This cheap US stock is our latest buy

Of the 10 dividend shares we acquired for our family portfolio, nine are members of the blue-chip FTSE 100 or mid-cap FTSE 250 indices. That’s because I still see deep value hidden in FTSE 350 shares. However, my wife also bought one US share that we’ve never considered owning in 35 years of investing.

This mystery stock is Target Corporation (NYSE: TGT), America’s second-largest supermarket and general merchandise chain after $343bn giant Walmart. We bought into Target largely because its share price has crashed since its 2022 peak in late April. Here are the group’s current fundamentals:

Share price $152.78
52-week high $268.98
52-week low $137.16
12-month change -40.9%
Market value $70.8bn
Price/earnings ratio 12.7
Earnings yield 7.9%
Dividend yield 2.8%
Dividend cover 2.8
*Share price as at 5.30pm UK time on Wednesday, 27 July 2022

Why we bought Target

As you can see, Target stock is a long way from its 52-week high of nearly $270. Indeed, its shares are down more than two-fifths over the past 12 months. This has dragged the group’s price-to-earnings ratio below 13 and boosted its earnings yield to almost 8%. To me, this looks cheap in historical terms.

What’s more, following this share slump, Target now looks like a reasonably priced dividend share to me. Its dividend yield of almost 3% a year is comfortably ahead of the 1.7% on offer from the wider S&P 500 index.

To sum up, we bought Target stock because it looked modestly priced for a major US corporation. But the group’s earnings are set to take a hit from red-hot inflation, rising interest rates and slowing US economic growth in 2022-23. But after falling more than 40%, I see a lot of this bad news as already being baked in to today’s price. Indeed, we might even buy more shares if the price weakens again!

The post Guess which cheap dividend share I bought for passive income? appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Target Corporation shares. The Motley Fool UK has no position in any of the shares mentioned. 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.