Since late June, my wife and I have been snapping up cheap shares. In total, we’ve bought 16 new shareholdings — six FTSE 100 shares and three FTSE 250 shares, plus seven US stocks.
Two FTSE 250 shares we bought for passive income
We bought all nine UK shares for their market-beating dividend yields. Thus, we added these to our family portfolio to generate extra passive income. And here are two cheap FTSE 250 shares we bought for their generous cash payouts.
Direct Line
Direct Line Insurance Group (LSE: DLG) is a well-known UK insurance provider. Starting out as a telephone-based motor insurer in 1985, Direct Line now sells business, life, pet and travel cover under various brands, including Churchill, Green Flag and Privilege.
However, this share has taken a beating in 2022. At its 52-week high on 19 January, this stock peaked at 313.7p. Five weeks later, Russia invaded Ukraine, crashing global stock markets. At their 52-week low on 28 September, Direct Line shares hit 171.7p.
On Friday, Direct Line shares closed at 217.6p, valuing the group at £2.9bn. To me, this seems a modest price tag for a group with over 13.2m insurance policies in force. It also leaves this stock down 19.6% over 12 months.
Currently, it looks cheap to me. With a price-to-earnings ratio of 10.8, its earnings yield is 9.2%. However, its market-beating dividend yield of 10.4% a year is covered only 0.9 times by earnings. Nevertheless, the group intends to keep paying out this bumper cash yield for the immediate future. And that’s why we’ll hold onto our Direct Line shares for now (and probably for the long term).
ITV
Like Direct Line, ITV (LSE: ITV) is what I call a ‘fallen angel’ — a share that has been relegated from the FTSE 100 to the FTSE 250 index. This followed steep falls in the ITV share price from February onwards.
At their 52-week high, the shares peaked at 125.9p on 18 November 2021. However, by 29 September, they’d collapsed to a 52-week low of 53.97p. At this price, they looked like a crazy bargain to me. The shares have since recovered ground, closing at 74.26p on Friday. Even so, this leaves them down 40.45% over the last 12 months.
Despite being the UK’s leading terrestrial commercial broadcaster, as well as a leading content provider for media companies worldwide, ITV is valued today at just £3bn. What’s more, its shares trade on a lowly price-to-earnings ratio of 6.3, for an earnings yield of 15.8%.
But what particularly draws me to this share is its bumper dividend yield of 6.7% a year. Even better, this is covered 2.3 times by earnings. To me, it indicates that this cash yield is solidly underpinned, with potential for future rises. And that’s why we won’t sell our ITV shares at anything near current levels.
Finally, these two firms are both heavily exposed to the UK economy. Indeed, their 2023 corporate earnings could be harmed by collapsing consumer confidence, soaring inflation, sky-high energy bills and rising interest rates. Next year could be very tough. But we’re not worried, because we aim to buy shares for the long haul.
