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There is a clear link between stocks that have lost value and the profit I can make from passive income. Because of the way a stock's dividend yield is calculated, a drop in the share price acts to increase the yield. Below are some examples of companies that could be fallen angels but can still offer me a lot of value for my investment.
A bump in profits
First is Ashmore Group (LSE:ASHM). It is an investment manager that specializes in emerging markets. The action is in the FTSE 250, with the share price falling 20% over the past year. This underperformance against the index indicates that the stock is potentially cheap.
This fall has contributed to increasing the dividend yield, which now stands at 8.05%. This makes it one of the highest-performing stocks in the entire index.
Part of the drop is due to the fact that revenue fell in the second half of 2023 to £94.5 million, from £110.3 million the previous half. The impact of this was driven by lower assets under management. At a basic level, the fewer assets Ashmore manages for clients, the less fees (and revenue) can be generated.
I don't see this problem as a big problem. I think if there are attractive opportunities in emerging markets, people will want to rekindle their involvement. The management team agrees with me, with the perspective that “Stronger growth, effective monetary policies and a weaker US dollar will underpin further increases in asset prices in 2024.”
Therefore, I don't see the dividend being threatened in the near future.
<h2 class="wp-block-heading" id="h-unloved-uk-stocks“>UK shares unappreciated
Another option that investors should consider is Murray Income Trust (LSE:MUT). The investment manager intends to allocate the majority of funds to UK equities, to generate income and growth.
The dividend yield is 4.98%, so the dividend box is checked. As for growth, the share price is down 5% over the past year.
I find escrow to be cheap for a couple of main reasons. Given that most of the exposure is to the UK, I think its overall market is cheap right now. I understand that sentiment towards the UK is weak. But when I look at the United States, the stock market is hitting all-time highs. There is a huge disconnect here and it feels like it is only a matter of time before global investors abandon expensive US stocks and funnel money into the UK.
The trust also looks cheap when I compare the share price with the net asset value (NAV) of the shares it owns. As of the March valuation, the NAV is 10% higher than the share price. Over time, I would expect this to reduce to zero.
As a risk, the UK stock portfolio would not help me diversify my overall investment fund at all. In fact, it would leave me more exposed to a bad year here in the UK, which may not be so wise.
For investors looking to snap up some cheap income stocks, I think both are worth considering.