Despite the ongoing stock market recovery that kicked off last October, there are still a number of British dividend shares looking cheap.
Apart from providing chunkier yields, the discounts also pave the way for more impressive capital gains, even from income stocks. As such, rather than focusing exclusively on high growth opportunities, like I normally do, I think discounted dividend stocks look quite appealing right now.
Price vs value
While it’s easy to muddle up, price and value are two distinct factors when it comes to investing. As billionaire investor Warren Buffett puts it: “Price is what you pay, value is what you get.“
An investor’s main objective is finding stocks whose price is below its value. That can often be the case when searching through shares that have taken a tumble. But it’s not a guarantee. Even during market volatility, where emotions make the decisions, investors could be justified in selling off a once-thriving business.
For example, a business might have already been struggling to adapt to changes in its industry. And with higher interest rates along with inflation, the problem has been exacerbated.
Alternatively, a company that’s heavily dependent on debt to expand may have seen its growth strategy evaporate as loans are now significantly more expensive to service.
However, occasionally, an investor may stumble upon a top-notch enterprise merely caught in the middle of market pessimism. And in my experience, these are the shares most likely to generate superior returns during the eventual recovery and thereafter.
Capitalising on high yields
Today, plenty of UK shares offer attractive yields. In fact, looking at the FTSE 100, 27 companies currently offer a payout in excess of 5%. Some, like Vodafone and M&G, have yields as high as 10%!
Under normal market conditions, such high yields can be a sign to steer clear. Why? Because it can be an early indicator of an upcoming dividend cut. And this threat is still present today.
However, with so many shares trading at a discount, not all of these chunky payouts are necessarily a trap.
Don’t forget that yield is influenced by share price moving in the opposite direction. Meaning that when a stock goes up, the payout goes down and vice versa.
This is what’s enabled such impressive yields within the UK’s flagship index. And for the firms whose cash flows remain intact, shareholders are already reaping the benefits of abnormally large passive income.
Of course, such opportunities won’t last forever. Once the economy is finally back on track and confidence returns, investors might start realising these bargains, pushing the price up and the yield down.
And for existing owners of these high-quality dividend shares, a lot of wealth could be unlocked. That’s why I’ve already started topping up my income portfolio this year.