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I’ve been hunting through the UK market for cheap dividend shares with above-average income yields. Here are two stocks that are on my radar.
Poised for a recovery?
FTSE 100 advertising group WPP (LSE: WPP) has faced some tough times over the last few years.
A global slowdown in spending on advertising and marketing has hit profits hard in recent years. Tariffs could also hit some of WPP’s larger customers.
WPP’s share price has now fallen by nearly 50% in three years. But advertising has always been a cyclical business, and I think a recovery is likely at some point.
In the meantime, the firm’s shares are starting to look unusually cheap to me. Broker forecasts price WPP shares on less than eight times forecast earnings, with a useful 6% dividend yield.
Cash generation has remained healthy, and the dividend still looks affordable to me as long as debt levels remain under control.
My main concern is probably that the growing importance of AI and online advertising could make it hard for WPP to return to past levels of growth and profitability. The company has expanded its digital capabilities in recent years, but investors are still waiting for a return to growth.
Buying contrarian or unloved shares requires investors to go against the trend. WPP is one stock where I think this is worth considering, especially for investors who are looking for income.
A renewable power play
North Yorkshire-based Drax (LSE: DRX) is best known as the owner of the UK’s largest power station, providing 5% of the nation’s electricity.
This used to be a coal-fired business, but the company’s big burners now rely on biomass, or wood pellets. This fuel is officially classified as renewable and attracts government subsidies, boosting Drax’s profits.
The obvious risk is that government policy on biomass support is not exactly predictable. Earlier this year, Drax agreed a new deal with the government to support its operations between 2027 and 2031.
This should allow it to keep operating when its current subsidy deal expires. But the new deal is said to be significantly less generous than the old one, so future earnings from biomass generation could fall.
Drax CEO Will Gardiner is not blind to this risk. He’s been adding other types of electricity generation to the group’s portfolio. The company’s assets now include hydroelectric power and battery storage.
Three new gas-powered turbines are also expected to start operation later this year, providing up to 900MW of additional capacity. They’ll be used to help keep the grid balanced alongside more variable renewable suppliers, with contracts already in place “worth over £250 million”.
Uncertainty over future earnings potential is weighting on Drax’s share price. Broker forecasts suggest profits could fall by 40% in 2026, compared to 2025. However, even these downbeat forecasts leave Drax trading on a modest P/E of 9, with a 5% dividend yield.
My guess is that the UK may continue to need Drax’s power generation even after 2031. If profits stabilise at 2026 levels, I think the shares could be too cheap right now.
For investors seeking opportunities among utility stocks, I think Drax is worth considering.
