Stock market crashes are brilliant for a long-term investor like me. When everyone is hitting the panic button, even reliable income stocks can be far cheaper than a company is worth.
For example, anyone who bought into a FTSE 250 index after the Great Recession in October 2008 would have seen a 100% increase by May 2011. Those buying the dip saw their investments double inside three years.
While we’re hardly at 2008 levels of panic, last year was the worst for UK stocks outside of the correction due to lockdowns in 2020. But signs are pointing in a better direction for 2023.
What happened to the FTSE 250?
A combination of headwinds like the Ukraine war and out-of-control inflation caused many shares to see price falls in 2022. The FTSE 250 dropped over 27% up to October.
The good news? Inflation is easing and interest rates are rising. The FTSE 250 seems to be on the mend – up around 4% in the last month – so now might be a great time to for me pick up cheap income stocks before they rise further.
The effect of falling share prices is that dividend yields go up, so some shares have superb payouts of 6% annually or more. If I buy at the cheaper prices, I can lock-in those yields. Here are three potential gems I’m considering for my portfolio.
Cheap shares with high yields
Housebuilder Redrow (LSE: RDW) saw its share price drop a massive 43% in 2022, which pushed its dividend yield to an enticing 6.14%. The company trades at a cheap price-to-earnings ratio of just over 9 and I don’t think the housing market is going to see a major drop in demand any time soon.
National Grid should need little introduction and its ubiquity in energy delivery across the country offers the company a virtual monopoly. The share price has seen strong performance in recent years but is down 16% from all-time highs. It also offers a substantial dividend yield of 5.06%.
Sequoia Economic Infrastructure Fund offers loans for infrastructure projects like offshore wind farms or student housing in developed countries. The company finds value in projects where risk assessment is difficult. The dividend yield currently sits at an impressive 7.46% and the share price is down 27% from all-time highs.
As a back-of-the-envelope calculation, £500 a month invested with 6% returns reaches £487,256 over a 30-year period. We’ve all got our own definition of being rich, but that amount sounds good to me. Of course, those dividends aren’t guaranteed and companies often reduce the payout so I have to take that risk into account.
Opportunity of a decade
That’s why it’s important to carefully choose the right stocks. Depressed valuations can be a good thing if the underlying company is strong, but I don’t want to risk catching a falling knife. In other words, not all stocks with a fallen share price are undervalued.
Equally, it’s a recipe for disaster to keep all my savings in only one or two stocks. So diversifying with several carefully chosen stocks from a range of sectors is important, too.
But with so many strong companies sporting a lower share price? I see now as a fantastic time to add income stocks to my portfolio, an opportunity I might not have again for years. These three are on my watchlist.
