When a stock falls in value, a couple of things could get triggered. One is that it could become a cheap share that’s undervalued. The other is that the dividend per share makes up a larger proportion of the share price, increasing the dividend yield. As a result, I’m always screening to try and find stocks that are worth buying on the dip. Here are two I’ve spotted recently.
A man’s best friend
The first one is Pets At Home Group (LSE:PETS). The stock is down 21% over the past year, with a current dividend yield of 4.41%.
Part of the reason for the move lower in the stock is due to the investigation by the Competition and Markets Authority (CMA). The launch of the investigation into the vet sector is related to concerns that certain products are being overcharged by sellers. This would include Pets At Home, although no wrongdoing has been found as yet.
As for financial results, the 2023 annual report was a mixed bag. Revenue jumped by 5.2% versus the previous year. However, pre-tax profits fell by 13.7%, driven by higher costs.
I think the stock looks cheap given that the latest update from earlier in August shows the business on track to increase profits versus last year. It looks to me like the management team agrees, as it recently announced a £25m share buyback programme.
The results of the investigation are a risk going forward, but at the same time if no issues are found then it could actually help to lift the share price as a result.
Investing in the future
Another idea is the Octopus Renewables Infrastructure Trust (LSE:ORIT). Down 18% over the past year, the trust has seen the dividend yield rise to 7.70%.
As the name suggests, the management team focuses on investing in a diversified portfolio of renewable energy assets across Europe, the UK and Australia. From the sale of the output from these assets, Octopus is able to generate high levels of cash flow. From there, it can afford to pay regular quarterly dividends to shareholders.
In the latest annual report, the fall in the share price was put down to “the difficult macroeconomic conditions which included falling power prices and a relatively poor year for wind speeds”. The risk is that this continues over the course of 2024.
However, even with earnings per share down in 2023, the dividend cover was still 1.18. A figure above 1 means that the dividends are completely covered by the latest earnings. It’s not massive cover, but makes me think that if the money can still be paid during a bad year, things are fine.
Looking to the long term, renewables like wind are the future. I expect demand to increase going forward.
Adding up the pounds
I’m considering adding both stocks to my portfolio. If I invested £250 a month in both, my combined dividend yield would be 6.05%. If I kept investing and bought the shares with my subsequent dividends too, things would grow quickly.
After a decade, my pot could be worth £78,676. This means that the following year, it could pay me out an average of £396 in income per month.
