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Investing in cheap stocks is a great way to lock in great future returns because of their significant growth potential. However, as the FTSE 100 flirts with new highs above the 8,000 point barrier, careful stock selection is arguably more important than ever.
I have been looking for value investing opportunities in the UK’s top tier benchmark. There are two undervalued dividend stocks that I would consider buying today if I had some extra cash to deploy.
The Footsie companies I am referring to are Khaki (LSE: PSN) and schroders (BVL: SDR).
Khaki
Investing in one of Britain’s biggest homebuilders might not be an obvious choice in a year when house prices are expected to fall. However, a 41% drop in Persimmon’s share price over the past 12 months has pushed the company’s dividend to sky-high levels.
At 16.66% today, the stock now boasts the highest dividend yield of the FTSE 100 Index by a considerable margin.
A chronic lack of supply in the UK property market means homebuilders have a crucial role to play going forward.
There is a British penchant for home ownership. I think this should continue to act as a tailwind for house demand and prices over the longer term. In turn, that should support Persimmon’s share price for years to come.
However, near-term risks cloud the outlook somewhat. A showdown between buyers and sellers could create conditions in which homebuilding activity stagnates.
In addition, there are challenges posed by rising interest rates and rising construction costs. Ultimately, the dividend could be threatened if the company’s cash flow takes a hit this year.
In general, I view Persimmon’s stock as a fairly high-risk play at present. The risk tradeoff is a downtrodden valuation, viewed at a price-earnings ratio of 6.15. This metric suggests that today’s stock price presents a bargain investment opportunity.
If I had some extra money, I would increase the average cost by investing small amounts in the company’s stock at regular intervals to smooth out any short-term volatility.
schroders
This multinational asset management company has also underperformed over the past year. Schroders stock price has fallen 23% in the last 12 months. On the other hand, a strong dividend yield of 4.21% increases the attractiveness of passive income from stocks.
After a big drop, I think Schroders stock looks cheap right now. But it’s important to look at the weeds first. The company’s assets under management (AUM) plunged in the third quarter to 30 September 2022, from £773.4bn to £752.4bn. At first glance, this does not seem like good news.
However, much of the decline can be explained by the £20bn drop in AUM for the group’s pension solutions business. The main cause behind this was the near-collapse of the liability-driven investment market that resulted from last year’s disastrous ‘mini’ budget.
Fortunately, that financial instability is in the rear view mirror. Looking ahead, I think the asset manager’s focus on higher-margin asset classes, sustainability and technology investments should help the stock continue its recent positive trajectory.
Granted, a stock market crash would probably dampen my hopes of a stock price recovery. However, few companies are immune in such circumstances. With some extra money, I would invest in Schroders stock today.
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