Last week I wrote about Aviva, with the stock trading close to 52-week lows. I argued that it was a good time to buy Aviva shares, based on the elevated dividend yield of 8.09% and the long-term fundamental outlook. This is just one example of how I can make a second income by specifically targeting stocks that are at low levels. Here’s the lowdown.
Focusing on the dividend yield
I’m predominately aiming to make a second income from the dividend payments on offer from the business. As such, not all stocks that are at 52-week lows will be applicable for my strategy.
Some will immediately ask why I’d specifically target dividend shares that are depressed, rather than more stable alternatives. The answer is simple and revolves around the dividend yield.
Two factors influence the dividend yield of a company. The first is the share price, the second is the dividend per share. Given that most large-cap stocks pay a dividend a couple of times a year, the dividend per share doesn’t alter that often. Yet the share price changes all the time!
Putting it into an example
So let’s say a business reported strong 2022 results, but has been caught up in negative investor sentiment or some short-term reputational problems. The share price could have slumped to 52-week lows. But if I’m confident that the financial results are going to continue to be strong, this is where I can take advantage.
The share price fall will have boosted the dividend yield. By buying the stock at the cheap price, I can effectively lock in the higher yield.
This can make a big difference to income potential. Let’s say the fictional company above was trading at 200p and paid a dividend of 10p, with a yield of 5%. If the stock fell to 52-week lows of 150p but the dividend remained the same, the yield jumps to 6.66%.
Acknowledging the risks
One risk here is that the stock keeps on falling beyond 52-week lows. This means that even though I might pick up a generous income, I’m faced with a loss on my capital from the share price fall.
Another point to consider is the reason for the fall. Sometimes it’s simply an overreaction from the market. But sometimes, it’s for good reason. If it’s due to poor financial results or a downbeat earning outlook, the future dividend per share could be cut.
Examples right now
Aviva is a great example of a stock that I’m looking to add to my portfolio. Aside from this, Reckitt Benckiser is another option to consider. The stock is close to 52-week lows, with a current yield of 3.46%.
This isn’t a static strategy. I can set my filter to alert me when stocks hit 52-week lows and then investigate further. Over time, I should be able to build up second income in this way.
