2 cheap shares to consider buying in a £20k ISA for income of £1,000 a year

Buying cheap shares rather than expensive ones isn’t a foolproof strategy. Sometimes stocks are cheap for a jolly good reason. And they may remain cheap, for years. Or even get cheaper, as performance flounders and investors give up.

Yet I don’t think that applies to the following two FTSE 100 companies. Both look good value to me. They also offer reliable-looking dividend yields of more than 5%.

An investor who divided this year’s £20,000 Stocks and Shares ISA contribution limit equally between these two could secure income of more than £1,000 a year. And there’s a fair chance that will rise over time.

HSBC offers dividends and growth

Asia-focused bank HSBC (LSE: HSBA) has a trailing dividend yield of around 5.9% a year. It looks attractively valued too, with a price-to-earnings (P/E) ratio of just under nine.

I’m surprised by that low P/E, given how well the shares have done. HSBC’s share price has climbed by 33% over the last year. Over five, it’s up 45%.

The board’s also been proactive in returning capital to shareholders through share buybacks, spending a thumping $3bn a quarter.

In its Q3 results for 2024, HSBC reported a profit before tax of $8.5bn, up from $7.7bn the previous year. Revenue also increased from $16.2bn to $17bn.

Yet the board isn’t resting on its laurels. It’s now winding down its investment banking arm as CEO Michael Roberts shifts to a “more competitive, scalable, financing-led model”. It will also have a tight Asia focus.

HSBC faces being the meat in a superpower sandwich, as the US and China face off. It’s clearly chosen its side. That’s not the only risk. If interest rates fall, that could squeeze net interest margins. The transitional process brings execution risks.

Greater exposure to China isn’t a one-way bet either, given the country’s property crisis. Donald Trump’s trade war won’t help. Yet I still think HSBC is well worth considering both for income and growth, with a long-term view.

Investing £10k in HSBC shares at the current yield would provide an annual income of £590.

My second income growth pick, cigarette maker Imperial Brands (LSE: IMB), boasts a trailing yield of about 5.5%. So £10k in that would deliver income of £550. That’s total income of £1,140, which I’d expect to rise over time as profits grow (no guarantees though).

Imperial Brands has rocketed this year

Imperial Brands also looks good value, with a P/E ratio of around 9.3. That’s despite the company’s share price surging 47% over 12 months, although it was volatile before that. Investors can’t expect the share price to simply plough on.

In its full-year results for 2024, Imperial Brands reported a 4.5% increase in operating profit to £3.55bn. That was despite a slight decline in total revenue.

Net revenue from next-generation products, including tobacco alternatives like vapes, grew by 26%. They now account for 8% of total revenue.

Cigarette stocks are inherently risky. Basically, companies are pushing a product that kills. They face constant regulatory pushback. Rising revenues from smokeless alternatives could trigger stiffer rules.

No investment is without risks. These two certainly aren’t. But their high income and growth prospects make both well worth considering. But only with a minimum five-year view. And ideally a lot longer than that.

The post 2 cheap shares to consider buying in a £20k ISA for income of £1,000 a year appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Imperial Brands Plc. 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.