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It's hard to find dividend stocks that are cheap. This is because if a stock underperforms, there is a risk that the dividend will be reduced over a period of time. However, finding a cheap idea can be very fruitful. Not only could the income accrue, but any rebound in the share price could boost returns further. Here are two that I like right now.
Stick to the property
He Alternative Income Trust (LSE:AIRE) is a real estate investment trust (REIT). This means it receives favorable tax treatment and other benefits, but is mandated to pay out a high proportion of its profits as dividends.
The firm owns and actively manages a diversified portfolio of properties in the United Kingdom. It particularly focuses on specialized real estate sectors such as education, healthcare, leisure and power plants.
Over the past year, the share price is down 0.9%. This may not seem like a bargain, but it is when I compare the share price to the net asset value (NAV) of the property portfolio. Based on the latest valuation at the end of last year, the share price is at a 19% discount to NAV. In theory, this figure should return to zero in the long term.
The current dividend yield is 9.31%, making it very attractive for income. This is paid quarterly.
One risk is that some of the real estate investments are not liquid. Projects such as power plants cannot be easily sold, making it difficult to generate cash if it is urgently needed.
An overlooked bank
The second company in focus is Invertec (LSE:INVP). The mid-tier bank may not have the large customer base of FTSE 100 banking peers, but it's still a great stock to consider adding.
Given that the share price is down 3% over the past year, I believe it is undervalued as the stock has not kept pace with the strong gains. The financial year ends at the end of March, so I don't have full year results. However, half-year figures showed that revenue was up 8.6% on the previous year. Adjusted operating profit increased 11.2%.
However, with a P/E ratio of 7.28, I think the stock price needs to rise to reach a ratio of 10 and be more fairly valued.
Income investors could help push the stock higher, thanks in large part to the 6.58% dividend yield currently on offer.
Of course, a risk for the bank (as for everyone in the sector) would be the fall in interest rates. This could reduce the net interest income you will earn in the future.
Show me the money
I like both stocks and am thinking of buying them. Let's say I can invest £250 in each share each month. The combined average return would be 7.94%. I'm also going to assume share price gains of around 2% each year, bringing the total annual return to 10%. I should note that these are purely forecasts and do not guarantee results.
On this basis, in a decade, you could have a boat worth £103.7k. Next year she could expect to earn just under £700 a month from dividend income alone.
