These UK stocks are cheap as chips for passive income

Jon Smith goes through two shares for passive income that have above-average dividend yields but are undervalued, in his opinion.

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There’s a definite link between stocks that have fallen in value and the benefit I can get for passive income. Due to the way a stock’s dividend yield is calculated, a fall in the share price acts to push up the yield. Here are some examples of firms that might be fallen angels but still can offer me a lot of bang for my buck.

A blip in earnings

First up is Ashmore Group (LSE:ASHM). It’s an investment manager that specialises in emerging markets. The stock sits in the FTSE 250, with the share price down 20% over the past year. This underperformance versus the index flags the stock up as potentially being cheap.

Such a fall has helped to push up the dividend yield, which now stands at 8.05%. This makes it one of the highest yielding stocks in the entire index.

Part of the drop has come from the fact that revenue fell in H2 2023 to £94.5m, from £110.3m the prior half-year. The impact of this was driven by lower assets under management. At a basic level, the less assets Ashmore handles for clients, the less fees (and revenue) that can be generated.

I don’t see this blip as a huge issue. I believe that if there are attractive emerging market opportunities, people will want to reignite their involvement. The management team agree with me, with the outlook that “superior growth, effective monetary policies and a weaker US dollar – look set to underpin further increases in asset prices in 2024”.

Therefore, I don’t see the dividend as being under threat in the near future.

Unloved UK stocks

Another option for investors to consider is the Murray Income Trust (LSE:MUT). The investment manager aims to allocate most of the funds into UK stocks, to produce both income and growth.

The dividend yield is 4.98%, so the dividend box gets a tick. As for growth, the share price is down 5% over the past year.

I see the trust as cheap for a couple of main reasons. Given that most of the exposure is to the UK, I feel its market in general is cheap right now. I get that sentiment towards the UK is weak. But when I look over at the US, the stock market is hitting all-time highs. There’s a big disconnect here and feel it’s only a matter of time before global investors cycle out of expensive US shares and channel the money towards the UK.

The trust also looks cheap when I compare the share price to the net asset value (NAV) of the stocks it holds. As of the March valuation, the NAV is 10% higher than the share price. Over time, I’d expect this to reduce closer to zero.

As a risk, the UK stock portfolio wouldn’t help me to diversify my overall investment pot at all. In fact, it would leave me more exposed to a poor year here in the UK, which might not be that wise.

For investors looking to snap up some cheap income shares, I think both are worthy for consideration.

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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