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Cheap dividend stocks are plentiful on the UK market, but not all are necessarily good buys. Lately I've been applying the rule to two companies I used to own and wondering if their low prices and excellent earnings make them worth adding back to my stocks and Shares ISA.
Great performance
I lost faith in the station ITV (LSE: ITV) a few years ago. To date, it was a wise decision to sell. He FTSE 250 The members' share price has been stuck between 60p and 80p for around two and a half years.
I miss passive income though. Would I go back?
Well, the dividend yield remains juicy, standing at 6.4%. That's very impressive considering the stock is actually up 25% since January.
If City analysts have been correct in their calculations, it looks like this revenue will also be covered by full-year earnings. This despite total revenue falling 3% during the first half of 2024 due to a slightly complicated situation for its Studios division.
Bargain valuation?
This slight wobble is not enough to scare me. But one thing that does bother me is that ITV has become quite inconsistent in terms of handing out those dividends. It now yields much less per share than before the pandemic hit. Furthermore, popular sporting events such as Euro 24 do not take place every year and expensive productions may fail to capture the interest of viewers.
A price-to-earnings (or P/E) ratio of just nine arguably takes some of this into account. And with the UK economy appearing to come back to life as inflation concerns ease, the recent positive momentum could continue.
That said, I won't rush to buy until I read the next trading update, scheduled for November 7th.
Until then, it will be on my watch list.
Profit Warning
Another company that I have consulted again is the manufacturer of laser guided equipment. Somero Companies (LSE: SOM). Despite being a tiddler compared to the ITV, the AIM-The publicly traded company also generated an excellent income stream for my portfolio during the years I owned it.
Unfortunately, a heavy period of trading, thanks in part to rising interest rates, caused those dividends to fluctuate about where I sold. It's a shame. Of course, they can never be guaranteed. But I really look for consistency in everything I buy for income.
It's fair to say that 2024 hasn't been fantastic so far either. In July, holders were hit by a profit warning. At the time, management believed operations would improve in the second half. But with sales in its main market, North America, affected by project delays, Somero could still struggle to meet full-year guidance.
'Quality' Dividend stocks
Analysts are forecasting a total dividend of 24 cents per share for this financial year. Although I've already missed the first part of this, such a return would translate into a huge 6.3% return.
Elsewhere, I see that small caps still have many of the characteristics I look for: big margins, high returns on the money they invest, and a strong balance sheet.
Like ITV, I will be keeping an eye on this stock in the future, especially as the valuation is very similar. But I think there are better passive income opportunities right now.
