2 undervalued dividend shares that could pay me £700 a month

Jon Smith runs through two dividend shares outside of the FTSE 100 that combined could give him an average dividend yield of 7.94%.

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It’s difficult to find dividend shares that are cheap. This is because if a stock has underperformed, there’s a risk the dividend will be cut for a period of time. Yet finding a cheap idea can be very fruitful. Not only could I bank the income, but any rally in the share price could bolster returns further. Here are two I like at the moment.

Sticking to property

The Alternative Income Trust (LSE:AIRE) is a real-estate investment trust (REIT). This means it gets favourable tax treatment and other perks, but it’s mandated to pay out a high proportion of profits out as dividends.

The firm owns and actively manages a diversified portfolio of UK properties. It has a particular focus on specialist real estate sectors such as education, healthcare, leisure and power stations.

Over the past year, the share price is down 0.9%. This might not seem a bargain, but it is when I compare the share price to the net asset value (NAV) of the property portfolio. As of the latest valuation at the end of last year, the share price is at a 19% discount to the NAV. In theory, this should move back to zero in the long term.

The current dividend yield is 9.31%, making it very attractive for income. This gets paid out quarterly.

One risk is that some of the property investments are illiquid. Projects like power stations cannot easily be sold, making it tricky to generate cash if it’s needed urgently.

An overlooked bank

The second company in focus is Investec (LSE:INVP). The mid-tier bank might not have the large customer base of FTSE 100 banking peers, but it’s still a great stock for me to consider adding.

With the share price down 3% over the past year, I feel it’s undervalued as the stock hasn’t kept pace with strong earnings. The financial year runs through to the end of March, so I don’t have the full-year results. Yet the half-year numbers showed revenue up 8.6% versus the previous year. Adjusted operating profit jumped 11.2%.

Yet with a price-to-earnings ratio of 7.28, I feel the share price needs to rally in order for it to reach a ratio of 10 and be at a fairer value.

Income investors could help to push the stock higher, largely thanks to the 6.58% dividend yield on offer right now.

Of course, a risk to the bank (like all in the sector) would be falling interest rates. This could dampen the net interest income it makes going forward.

Show me the money

I like both stocks and I’m thinking of buying them. Let’s assume I can invest £250 in each stock each month. The combined average yield would be 7.94%. I’m also going to assume share price gains of around 2% each year, bringing the total annual yield to 10%. I have to note that these are purely forecasts and don’t guarantee results.

On this basis, in a decade, I could have a pot worth £103.7k. The following year, I could expect to make just under £700 a month purely from the dividend income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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