That prolonged price weakness means many top UK shares carry extremely high dividend yields. Plenty also change hands for rock-bottom price-to-earnings (P/E) ratios.

Let me talk you through two cheap dividend shares that have caught my attention: B&M European Value Retail (LSE:BME) and Investec (LSE:INVP). But are they irresistible bargains or classic income traps?

B&M European Value Retail

B&M shares trade on a forward P/E ratio of 7.8 times. They carry a dividend yield of 6.1% for this year too.

That’s very attractive at first glance. However, I think investors need to take care before considering this income stock. Why? Its sky-high dividend yield today is a product of its sinking share price. Over a 10-year horizon, B&M’s yield consistently ranged far lower, at between 2% and 3%.

The value retailer’s been battered by:

• A series of profit warnings as weak consumer spending has battered revenues.
• Accounting errors that have dented investor confidence.
• Rising costs, including greater labour and freight expenses.
• High-profile management departures.

The problem for me is B&M isn’t showing signs of turning the corner… at least not yet. Like-for-like sales at the core B&M UK division dropped 0.6% in the December quarter. Can it recover as the cost-of-living crisis endures? I’m not convinced.

On the plus side, this year’s expected dividend is covered twice by anticipated earnings, providing a strong layer of protection. However, there’s a strong possibility that B&M’s share price will continue sliding, in my view. I’d rather search for other high-yield stocks to buy.

Investec

Investec’s forward dividend yield is 6.4%, more than double the current average for both the FTSE 100 and FTSE 250. It also carries a low P/E ratio of 8 times.

Risks have risen following the start of the Iran War. With the return of inflation threats and the global economy showing signs of stress, the danger of more credit defaults and reduced loan demand has grown. And so Investec’s shares have fallen in value.

However, I think the bank deserves serious attention at these prices. And especially from passive income investors — in my view, current dividend forecasts look rock solid. This year’s predicted payout’s covered two times by anticipated earnings.

What’s more, Investec’s CET1 capital ratio sits at 12.3%, comfortably above regulatory requirements and which should support more market-beating dividends.

Investec’s raised its annual dividend in 12 of the last 13 years. And over the last decade, the dividend yield has regularly averaged a healthy 4%–6%. Unlike B&M, it has a long record of offering attractive yields.

Can the bank keep delivering market-beating dividends? I’m optimistic it can, underpinned by rising demand for financial services, and especially wealth management in which it’s expanding. I think it’s a top income stock to consider.

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Past performance is not necessarily a guide to what may happen in future. But it can still provide an interesting perspective on how UK shares have fared over time.

The FTSE 100 has been doing well

Take the flagship FTSE 100 index of leading blue-chip shares, for example.

Over the past decade, it is up by 67%. So, someone who put £15,000 in back then ought now to be sitting on a portfolio worth a little over £25,000.

Not only that, but there have been dividends along the way.

Today, the index yields 3.1%. But someone who invested a decade ago would be earning around 5.1%, thanks to the growth in the index price over those 10 years. So they ought to be earning close to £780 per year in dividends.

Plus, they would have earned dividends every year in the past decade.

Dividends at a company are never guaranteed and one of the benefits of investing in a diversified group of 100 firms is that any one company cutting or cancelling its payout has a limited impact on the overall yield of the index.

What about the FTSE 250?

Of course, the FTSE 100 only represents some of the London market.

The FTSE 250 is composed of small and medium-sized firms. Over the past five years, it is up – but only by 1%!

So, £15,000 invested five years back would now be worth around £15,150.

There is a dividend and, currently standing at 3.9%, the yield is more attractive than the FTSE 100 one. On £15,000, that yield would provide around £585 of passive income per year.

Looking beyond index tracking

It might seem that the lesson is that bigger is better. But a five-year historical snapshot is not necessarily indicative of what to expect in future. I own FTSE 250 as well as FTSE 100 shares.

One way to invest in an index (like either of those) is to buy shares in a tracker fund. An alternative approach can be buying individual UK shares, although when I do this I still make sure my portfolio remains diversified.  

Lots of people buy individual shares thinking they can beat the index, but in practice this can be more difficult than it looks.

For example, consider my investment in B&M European Value Retail (LSE: BME).

While the FTSE 250 index has not done much in the past five years, it has at least done far better than B&M. The FTSE 250 retailer’s share price has collapsed 68% during that period. Ouch!

The 7.5% dividend yield is close to double the FTSE 250 average. But even taking that into account, the share has destroyed, not created, value for shareholders over the past five years.

I bought during that price fall, so my loss to date is smaller, but I remain in the red on this particular UK share. B&M has struggled to compete well enough on price in recent years and I see that as an ongoing risk.

But at seven times earnings, I see the current price as a possible bargain and have no plans to sell.

B&M has a large customer base and economies of scale that could potentially help get it back on track.

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Because they’re smaller, they often use generous payouts to attract new investors and support their share prices. That can work well, but it also raises the risk of a dividend cut if profits or cash flow fall short. So it’s critical to check the company’s track record and how well the dividend is covered.

Three names that caught my eye recently are MONY Group, B&M European Retail (LSE: BME) and Aberdeen Group. Between them, their average yield comes in at around 7.5%, more than double the FTSE 250’s overall average. That could give a serious boost to an income-focused portfolio.

Here’s why I think they’re good picks to consider.

Highest yield, stretched coverage

Offering the highest yield of the three at 7.8%, MONY Group’s supported by a 19-year payment record. Its earnings cover the dividend by 82.4%, which is tighter than I’d like but still adequate, in my view.

Cash coverage of 1.7 times tells me the business is turning enough profit into cash to fund the payout, though there isn’t a huge margin for error. The main risk here is a downturn in trading or rising costs squeezing that cushion and forcing management to reset expectations.

Moderate yield, strong coverage

B&M European Retail brings a 7.5% yield to the table, backed by 11 years of dividends. That’s shorter than MONY’s history, but still a decent track record for a retailer.

Payouts only make up 53.2% of earnings, which is excellent, and is further backed by cash coverage of 2.1 times.

What’s particularly attractive about BME right now is the low valuation. With a price-to-earnings (P/E) ratio of only 7 and a price-to-sales (P/S) ratio of 0.32, it looks very cheap. That adds significant price growth potential to the mix.

The obvious risk is the consumer backdrop: if inflation picks up again or real wages come under pressure, shoppers may rein in spending and hurt profits. Retail is also highly competitive, so any misstep on pricing or stock could dent performance.

Lower yield, best track record

Aberdeen Group has the lowest yield of the trio, at 7.3%, but it combines that with excellent safety indicators. It boasts a 20-year payment history, with earnings coverage of 67.4% and cash coverage of 2.3 times.

That mix of longevity and strong cash support makes the payout look highly reliable. But asset managers can be sensitive to market swings and investor sentiment. A sharp fall in markets, or sustained outflows from its funds, could still threaten future payments.

Final thoughts

For investors targeting sustainable income, this 7.5%-yielding mini-basket is an example of how to identify promising mid-cap stocks. On balance, I think all three shares offer attractive income potential, with different trade-offs between yield and safety.

As always, it’s best to spread investments across various sectors to avoid relying on any single dividend. I’m also interested in a few FTSE 100 shares that could add a level of defensiveness.

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Yet, there’s a slight catch here. So I’ll break down exactly what investors need to watch out for.

A divisive opportunity

Depending on which analyst report you read, B&M’s either a deeply bottomed-out classic value stock or a massive value trap heading even further south. And the trouble is, there’s evidence to support both arguments, creating a fairly split opinion among the experts.

So how did we get here?

The collapse of B&M shares stems from a series of cascading problems, including an inventory glut, subsequent profit warnings, an accounting error, and CEO and CFO departures.

It goes without saying that’s the exact opposite of what investors want to see from a business. Even more so, given that these operational mistakes have resulted in B&M losing market share at a time when the wider discount retail industry has been thriving.

But with new leadership at the helm, is there hope for a turnaround, or is it still all downhill from here?

Bull versus bear

Even with weakened earnings projections for 2026, B&M shares are still exceptionally cheap with a forward price-to-earnings ratio of just 7.4. It’s one of the lowest valuations in the sector. And it’s why even at an 8.3% dividend yield, shareholder payouts are actually still comfortably covered by cash flow.

What’s more, this coverage could soon start steadily improving under new CEO Tjeerd Jegen. It’s still early days. But his ‘Back to B&M Basics’ plan of simplifying the product range, cutting prices, and improving value perception among consumers has begun delivering results.

Organic UK like-for-like growth’s starting to move back in the right direction. And at the same time, B&M’s expansion efforts in France are seemingly firing on all cylinders, delivering double-digit growth reminiscent of the group’s historical UK performance.

The question now is, was the recent boost to organic growth driven by genuine improvement, or was it due to the trading period covering the Christmas shopping season?

That’s one of the key arguments that bearish investors are making right now. Suppose the next set of results shows negative or even just slower like-for-like growth? In that case, it suggests that Jegen’s strategy may simply not be enough to recapture lost market share.

In such a scenario, that likely means more pressure on earnings and, in turn, the dividend yield. So where does that leave investors today?

The bottom line

While there are some early signs of improvement, the seasonality impact makes it difficult to determine whether this was due to improved strategy or merely a temporary blip.

Investors will soon find out in the coming quarters of 2026. But given the firm’s poor recent track record of delivering on its promises, I think the wiser move right now is to be patient and wait to see how the situation unfolds.

Therefore, even with a tasty-looking, cash-covered dividend yield, I think there are far more promising income opportunities to explore elsewhere.

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Despite most discount retailers thriving in a high cost-of-living environment, B&M found itself being left behind due to strategic missteps. And investors have punished the FTSE stock severely, with over 70% of its market cap wiped out between the start of 2024 and the end of 2025.

Yet in 2026, the tide might finally be turning. Why? Because B&M shares are actually beating the market!

A discounted discounter

Less than a quarter into 2026, and B&M shares have steadily ramped up by 6%. And a £5,000 investment at the start of January is now worth £5,300.

By comparison, the FTSE 100 has only mustered a 3.6% return so far this year. And the FTSE 250 has been even weaker with a 1.1% loss.

So, why are B&M shares now outperforming?

The momentum seen so far is being driven by a variety of factors. However, it essentially boils down to a recovery bounce after years of catastrophic decline.

Accounting errors, inventory gluts, and a string of profit warnings under previous leadership have done a lot of damage to both the business and investor confidence.

But with a new CEO at the helm, hope of a turnaround has started to emerge. And with B&M shares now trading at a dirt-cheap price-to-earnings (P/E) ratio of just 7.3 compared to the wider retail industry average of 18.5, value investors have started taking notice.

The start of a comeback?

Earlier this year, B&M published its latest quarterly results covering October to December 2025. The results were fairly mixed and included yet another guidance cut. But there were also some early green shoots of genuinely encouraging progress.

For example, December saw a 3% bump in like-for-like growth. That may not seem groundbreaking, but it’s the first meaningful positive organic growth figure seen in over a year. And even better, this momentum continued into January, suggesting it might not just be a fluke driven by the holiday season.

As for the downgraded outlook, while frustrating, it’s worth highlighting that this comes as a result of management hitting the reset button by accelerating stock clearance and rebuilding its value credentials in the eyes of customers.

All in all, the new management team have seemingly laid the foundations of a multi-year recovery. And providing there are no hidden cracks, B&M shares could continue to beat the market in 2026 and beyond.

What to watch

Even with some encouraging early progress, there’s still a long road ahead.

Cutting prices to recapture lost market share appears to be a prudent move. But being forced to do it at a time when minimum wage hikes are driving up labour costs is far less than ideal, squeezing profit margins from two directions at once.

This earnings pressure is only compounded by the £2.5bn of outstanding debts & equivalents on the balance sheet. And while the bulk of its loans don’t mature until 2028 to 2030, the clock is nonetheless ticking for management to restore free cash flows.

Given these risks, I want to see a bit more progress before snapping up any shares. But if management continues to deliver and the P/E ratio remains in dirt-cheap territory, it’ll likely be hard not to be tempted.

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The story’s been quite different for buy-to-let real estate investors. With continuous tax hikes placed on landlords (that don’t have the protection of an ISA tax wrapper), it’s becoming increasingly harder to turn a profit.

That’s why, for investors looking to build up wealth from scratch at 40, I think investing in cheap UK shares is a far more viable and profitable strategy.

But how much money could an ISA make?

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A quick profit forecast

By putting aside £500 each month to invest in quality UK stocks, index investors have historically averaged a long-term return close to 8%. And assuming the market maintains this average pace, that means over the course of 25 years, a £500 monthly investment would grow into a £475,500 pension pot.

That’s pretty nice. But rather than relying on a cheap-and-cheerful index fund, investors can craft a custom portfolio that focuses exclusively on terrific companies trading at discounted prices.

There’s no denying that this strategy requires significantly more discipline. But it also opens the door to market-beating returns. And even if that means earning just an extra 2% a year, over 25 years, that compounds into £663,417 – a near-£190,000 increase in long-term wealth.

So now the question becomes, how do you find the best cheap UK shares to buy?

Spotting bargains

One of the most popular methods for finding potential bargains is to filter stocks using the price-to-earnings (P/E) ratio. While it varies between industries, most UK shares typically sit below a P/E ratio of 12-15. And right now, applying this filter to the wider FTSE 350 reveals B&M European Value Retail (LSE:BME) as a potential bargain at a P/E of just 7.7.

So should investors rush to buy?

A discounted discount retailer

Through a combination of strategic mistakes, inventory mismanagement, and a surprise accounting scandal, B&M shares have been thrown into the gutter. The result has been a painful multi-year decline that’s wiped out almost 70% of the firm’s market-cap since the start of 2024.

However, with a new CEO at the helm, could that be about to change?

The company is now executing its ‘Back to B&M Basics‘ turnaround strategy, which is starting to bring shoppers back through its doors. But recapturing lost market share to other discounters isn’t going to be easy, especially with wage inflation driving up operating costs.

The group’s now also flirting with the idea of launching its first-ever online shopping platform, expanding into new digital channels for the first time. But this too comes with significant execution risk.

So what’s the verdict? B&M’s cheap valuation is a reflection of the uncertainty surrounding this business. Right now, I think the best course of action is to maybe wait and see.

If more encouraging results emerge signalling the start of a cyclical reset, then it might be wise for investors to think about doing a little discounted shopping.

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In fact, the analyst team at Berenberg Bank has recently reiterated its Buy recommendation with a 300p share price target. And while the experts at Citi are still on the fence with a Hold recommendation, they still hiked their share price target earlier this month.

Compared to where the stock’s trading today, that means investors could be looking at a near-70% capital gain over the next 12 months, paired with a tasty-looking 7.3% dividend yield.

So is this cheap stock a no-brainer?

A bit of context

With inflation driving up the cost of living, discount retailers have been largely thriving and taking market share away from leading supermarkets like Asda and Sainsbury’s. However, despite being a prominent discount retailer, strategic missteps meant B&M almost entirely missed out on this tailwind.

Poor forecasting of consumer demand for certain product lines resulted in an inventory surplus of slow-moving products. This error ultimately led to slower sales and margin erosion as B&M was effectively forced to heavily discount these items, resulting in a painful series of profit warnings.

Skip ahead to October last year, and an accounting scandal revealed £7m of additional freight costs that hadn’t been recognised, leading to the resignation of its CFO. And when combining this series of disappointments with lost market share and higher labour costs, it isn’t surprising that investors quickly started jumping ship.

A hidden opportunity?

We’re now in 2026, and B&M has a new leadership team at the helm, aiming to get the business back on track, starting with product line simplification and re-establishing B&M’s value perception among consumers.

The latter’s definitely the harder endeavour, especially in a fiercely competitive retail marketplace. And yet, there are signs this strategy’s working. In December, like-for-like sales returned to positive territory, albeit by a small amount.

It’s possible this was just a one-time fluke supported by usual Christmas spending activity. But it’s worth pointing out that this sales momentum continued into January. And if this like-for-like sales trend has continued, it could confirm December as a key inflexion point for this business as it undergoes a multi-year turnaround strategy.

This hopeful outlook is why B&M shares are actually up 9% year to date. And with the shares still priced at just 7.6 times forward earnings, Berenberg’s aggressive forecast may be fulfilled if the company’s next set of earnings shows continued recovery progress.

The bottom line

With B&M still priced as a dirt-cheap stock, it’s clear that not every investor’s convinced, myself included. While the firm’s latest results are undoubtedly encouraging, the recent spree of broken investor promises and earnings misses means I’m keeping the business on a short leash.

However, if management continues to deliver promising recovery progress, I might have to rethink it. That’s why I believe investors should consider keeping a close eye on this stock throughout 2026.

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It’s with this stock picking strategy in mind that the team of experts at Berenberg Bank have spotted something interesting: a dirt cheap retailer trading at just seven times earnings at the beginning of a potential Rolls-Royce-like turnaround story.

So what is this mystery stock? And is now the perfect time to consider investing?

The next Rolls-Royce?

Five years ago, Rolls-Royce’s financials were in a dire state. While the pandemic obviously did a lot of damage, the engineering giant’s problems started long before Covid-19 came knocking. Strategic missteps and operational mismanagement led to the business bleeding cash, with stagnating sales and ever-increasing losses.

While not as extreme, there are some parallels that can be drawn with B&M European Value Retail (LSE:BME) today. Rising labour costs, inventory mismanagement, and poor strategic execution have led to margin erosion, higher debt, and tumbling profits.

But if the experts are right, that could all soon be about to change.

The road to recovery

With B&M recognising its errors, a new leader has been brought in to right the ship and get the business back on track. And while Tjeerd Jegen has only been in the corner office for less than a year, his ‘Back to B&M Basics’ turnaround strategy’s already starting to bear fruit.

By simplifying product lines, cutting prices, clearing out old inventory, and giving more operational freedom to store managers, B&M hit a critical milestone overlooked by most investors – like-for-like sales have returned to growth. And this trend also continued into January.

Of course, whether revenue momentum will be sustained has yet to be seen. But it’s nonetheless an encouraging early recovery signal that could become even more prominent as management accelerates execution throughout 2026. And that helps explain why B&M shares are already outpacing the FTSE 250 so far this year.

What’s next?

A return to organic growth is definitely a step in the right direction, especially if this can continue in line with expectations.

In fact, Berenberg is projecting that with good execution, B&M shares could rally to 300p – a 68% potential return over the next 12 months. And if the retail stock’s able to make a full recovery back to peak 2024 levels, then a 236% recovery rally could be on the table across the next handful of years – something that Rolls-Royce will struggle to deliver at a market-cap of £105bn versus B&M’s £1.7bn.

However, as previously highlighted, that all depends on good execution. Even after stabilising sales growth and restoring margins, B&M then needs to recapture its lost market share from a fiercely competitive rivals – a task that’s far easier said than done.

So with all that in mind, what should investors do? Personally, I’m still a bit on the fence. B&M appears to be making the right moves, but with the recovery still in its early rounds, I want to see a bit more progress before throwing my hat into the ring.

Luckily, there are plenty of other turnaround opportunities to explore within the FTSE 250.

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Yet, even with such tremendous growth under its belt, the UK stock market might still have some big winners in 2026. And right now, institutional investors have their targets locked on a handful of more dividend-paying stocks set to potentially deliver explosive gains this year.

So the question is, what are these potential winners?

1. B&M European Value Retail

After strategic missteps, inventory mismanagement, missed earnings targets, and even a minor accounting scandal, B&M (LSE:BME) shares have been utterly decimated in the last few years. In fact, its market-cap has collapsed by almost 70% in the last two years.

But with a new leader at the helm executing a fresh turnaround strategy, some institutional investors believe a massive buying opportunity may have emerged.

Revenue growth remains lacklustre, but sales have begun slowly ticking up again. And with international operations building momentum, the experts at Berenberg believe B&M shares could surge by 70% from current levels if the turnaround is successful.

Obviously, the stock comes with significant execution risk. And the fierce competitive landscape from other discount retailers only adds to the challenge. But with a 7.5% yield, the dividend stock could be worth a closer look.

2. Domino’s Pizza Group

Domino’s Pizza (LSE:DOM) is another dividend-paying stock that analysts believe could be ripe for a turnaround. With the CEO recently stepping down and the economic landscape for pizza takeaway less than ideal, the company’s similarly been under significant pressure, with its shares being slashed in half since 2024 kicked off.

But with a new loyalty programme rolled out this year, signs of improving unit economics emerging in Ireland, and an industry-leading store footprint, the team at Peel Hunt has issued a 275p share price target – roughly 52% higher than where the stock trades today.

Of course, while the customer loyalty programme had a successful pilot scheme, that doesn’t mean a full-scale rollout will meet performance expectations. Continued macroeconomic weakness alongside UK pizza market saturation may prevent this target from being hit. Nevertheless, with a 6.1% yield on offer, this is another dividend stock worth investigating further.

3. Mortgage Advice Bureau

Another dividend stock on Berenberg’s shopping list is Mortgage Advice Bureau (LSE:MAB1). Just last month, its analysts reiterated a 1,150p share price target – roughly 50% ahead of where the stock trades today.

The forecast mostly revolves around a UK housing market recovery narrative. An estimated 1.8 million fixed-rate mortgages are due to switch to variable rates throughout 2026, up from around 1.6 million in 2025. And with many households likely seeking to refinance, it creates a potentially lucrative advisory opportunity for this business.

The company’s facing increasingly fierce competition from large banks offering mortgage advisory services directly. What’s more, the market seems to be pricing in multiple interest rate cuts throughout 2026. But if these fail to materialise, mortgage rates could actually start climbing again, lowering refinancing demand.

With a 2.8% dividend yield on offer, Mortgage Advice Bureau could still prove to be a lucrative income opportunity. That’s why I think it deserves a deeper dive. But there’s no denying significant cyclical risk is attached.

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Yield is a historic snapshot, not a guarantee

When looking for income stocks to buy many investors pay close attention to a company’s dividend yield. But that is only a snapshot of what the company has paid out in the past.

There are all sorts of reasons why even a strong company might cut its divided. Business performance may be weak. Or a company may be in a cyclical industry like mining, meaning that cash flows suddenly fall dramatically and a longstanding dividend gets the axe for the foreseeable future. Or could simply be a change in management priorities, using spare cash for a purpose other than a dividend.

As an investor of course I look at a company’s yield when assessing its shares, but I try to focus more on what I think the likely future dividend (if any) will be.

Income can come at the price of growth

Those management choices about how to deploy spare cash matter.

Legal & General is one income stock many investors look to buy when they want to boost their dividend streams.

As it is the highest-yielding share in the FTSE 100 index, at 8.1%, I understand that.

But over the past five years, the share has moved up just 8%, whereas the wider index has moved up 59%.

Might the Legal & General share price have performed better if management had used more spare cash to fund business growth, rather than supporting a beefy dividend?

It is possible, though in reality it is hard to second guess hypothetical scenarios. What we do know is that some companies prioritise dividends at the cost of growth and, over time, it hurts their performance.

When looking for income stocks to buy, I always try to bear that in mind.

Dividend cover matters

I also consider how well covered I expect a dividend to be. I look at earnings, but I also look at cash flows as dividends are ultimately a cash cost.

For example, B&M European Value Retail (LSE: BME) issued a profit warning last week, saying it plans to cut prices to shift stock. That could hurt operating cash flows.

In its interim results, the ordinary dividend of 3.5p per share was amply covered by adjusted diluted earnings per share of 7.2p. It was also covered, but less comfortably, by statutory diluted earnings per share of 5.2p.

But net cash financing outflows of £377m were bigger than net cash operating and investing inflows of £326m. That was not just due to the dividend, but clearly the dividend added further strain on the cash flows.

B&M remains profitable and is generating sizeable cash flows at the operating level. With its strong brand and large customer base, I plan to keep holding the shares.

However, I am mindful of the possibility that management may decide the current balance of cash flows could be improved by reducing the total amount spent on dividends.

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