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Investing in cheap stocks is a great way to secure great future returns due to their great growth potential. However, since the FTSE 100 index Flirting with new highs above the 8,000-point mark, careful stock picking is arguably more important than ever.
I have been looking at the UK’s premier benchmark for value investment opportunities. There are a couple of undervalued dividend stocks that I would consider buying today if I had some spare cash to spread.
The FTSE companies I’m referring to are persimmon (LSE: PSN) and Schroders (LSE: SDR).
persimmon
Investing in one of Britain’s largest homebuilders may not be an obvious choice in a year when house prices are expected to drop. However, the 41% drop in Persimmon’s share price over the past 12 months has sent the company’s earnings to new heights.
At 16.66% today, the stock now boasts the highest dividend yield in the FTSE 100 by a significant margin.
Chronic undersupply in the UK housing market means homeowners have a crucial role to play in the future.
There is a British penchant for home ownership. I think this should continue to act as a tailwind to housing demand and prices over the long term. In turn, that should provide support for Persimmon’s share price in the coming years.
However, near-term risks cloud the outlook somewhat. Confrontation between buyers and sellers can create conditions in which homebuilding activity stagnates.
In addition, there are the challenges of high interest rates and high construction costs. Ultimately, the dividend could be threatened if the company’s cash flow takes a hit this year.
In general, I see Persimmon stocks as a somewhat high-stakes game at the moment. Risk compensation is a volatile valuation, seen in the price-earnings ratio of 6.15. This metric indicates that today’s share price represents a good investment opportunity.
If I had some spare cash, I would average the cost by investing small amounts in company stock at regular intervals to cushion any near-term volatility.
Schroders
The multinational asset management company has also underperformed over the past year. Schroders share price is down 23% in the past 12 months. On the other hand, the strong dividend yield of 4.21% enhances the attractiveness of passive income for the stock.
After a big drop, I think Schroders shares are looking cheap at the moment. But it is important to look at weeds first. The company’s assets under management (AUM) fell in the third quarter to September 30, 2022, from £773.4 billion to £752.4 billion. At first glance, this does not seem like good news.
However, much of the decline can be explained by the £20 billion drop in assets under management of the group’s pension solutions business. The main reason behind this was the imminent collapse of the responsibility investing market caused by last year’s disastrous “mini” budget.
Fortunately, this financial instability is in the rearview mirror. Looking ahead, I believe the asset manager’s focus on higher margin asset classes, sustainability and technology investments should help the stock continue its recent positive trajectory.
Certainly, the stock market crash is likely to dampen my hopes for a stock price recovery. However, few companies are immune to such circumstances. With some spare cash, I’m going to invest in Schroders shares today.
