What’s more, the stock has a price-to-earnings (P/E) ratio of 5.2. This compares to 16.4 for the index as a whole, which implies that the share is significantly undervalued and — in theory at least — is likely to deliver some capital growth.

On the face of it, the stock could be in bargain territory.

The devil’s in the detail

However, as a rule of thumb, it’s often said that shares offering a yield over twice that of the 10-year gilt rate — currently 4.64% — should be treated with caution.

And this appears to be good advice when it comes to the specialist asset manager. A look at the five-year share price chart shows that it’s fallen 77%. When combined with a dividend that’s remained unchanged for the past four financial years, the yield has gone through the roof.

However, the company’s assets under management (AUM) have fallen in recent years. At 31 March 2021, the figure was £30.9bn. Four years later, £22.6bn. A lower AUM means fewer opportunities to earn management fees and performance bonuses.

During the year ended March 2021 (FY21), it reported revenue of £175.1m, a profit after tax (PAT) of £27.7m and adjusted diluted earnings per share (EPS) of 87.4p. By FY25, revenue had fallen to £169.8m, PAT dropped to £16.7m and EPS was 56.81p.

A new dividend policy

Falling earnings can put a stock’s dividend in jeopardy. And that’s what’s happened with Liontrust. For FY26, the asset manager will pay a dividend of at least 50% of adjusted EPS. Any additional excess capital will be used to buy the company’s own shares.

Had this policy been in place for FY25, the group’s dividend could have been 60.6% lower at 28.4p. Suddenly, the stock’s current enormous yield makes more sense — investors have priced in a cut in its payout.

At 28.4p, the stock would be yielding just under a still generous 10%. This is attractive but no longer the highest on the FTSE All-Share index.

Pros and cons

Encouragingly, the AUM number was unchanged during the first quarter of FY26. And in these uncertain times, the group remains confident that investors will move away from “passive vehicles” and look to fund managers to help grow their portfolios more quickly.

It’s also embarked on a significant cost-cutting exercise to help improve its bottom line.

But the group’s attractive P/E ratio of 5.2 is based on an adjusted EPS figure that adds back the cost of staff redundancies, certain legal expenses and the amortisation (writing-off) of certain intangible assets. Without these changes, EPS would be 26.2p and the group’s P/E ratio would be 11.4.

Don’t get me wrong, a stock offering a yield of 9.5% and a P/E ratio of 11.4 would definitely catch my eye and justify further investigation. However, the decline in its AUM concerns me. That’s why I’ll revisit the investment case when I see this growing again. Until then, taking a position would be too risky for me.

The post With a massive yield of 24.2% and a dirt cheap P/E ratio of 5.2, should I buy this dividend share? appeared first on The Motley Fool UK.

If it comes good, £10,000 invested today could turn into £11,900 in a year. If it continues at that rate for the next 10 years we could end up with £56,900, with dividends reinvested. That’s the kind of magic that compound returns can weave.

Common sense and the ‘no free lunch’ idea will suggest that’s an unlikely scenario. Never mind the fact that dividends are never guaranteed, we already see this one is set to fall. Analyst forecasts show it dropping by 2027 — but only to 14%. And that’s still, well… wow! We need to dig deeper.

Big picture

The share price chart above already paints a gloomier picture, with the Liontrust share price down a whopping 86% since a peak in 2021. That’s boosted today’s dividend yield. But anyone who bought at the peak should be expecting only 2.8% this year on what they paid in 2021.

Even then, the expected cash wouldn’t be close to being covered by forecast earnings. So has what initially might have looked like a no-brainer buy turned into one to keep at barge-pole distance?

The company seems to think its shares are too cheap. In March, it completed a share buyback valued at £5m. So it’s been returning even more cash on top of those big dividends. And it’s coming from… hmm, I’m not quite sure where.

Fickle investors

One problem is that the past few years of high interest rates have turned a lot of investors away from the stock market. Cash savings can be more attractive, and just look at where gold and Bitcoin have gone.

At times like this, I’d expect smaller investment firms to suffer more outflows than the bigger players. Liontrust has a market cap of only £235m. Assets under management stood at £22.6bn at 31 March, and have been falling.

Compare that with a company like M&G in the FTSE 100. The market cap there is up at £6.1bn. And it had £346bn in assets under management at the last count.

What next?

In April’s trading update, Liontrust CEO John Ions said “It feels that over the past few years, the only certainty has been uncertainty“. I know what he means.

He told us: “The enhancements we have made to the business, our strong investment capability, brand and client service, and the robust operating model give us confidence we can emerge stronger from the current turbulent environment and help our clients to do so as well.“

I do see stock market investing returning to strength as the economy improves and interest rates fall further. It’s what UK stocks and shares have done for way more than a century now. In the long term, they’ve just kept going up and have easily beaten cash-based investments.

Optimism vs uncertainty

If the CEO’s optimism is well placed, we could be looking at a buying opportunity now. But until I can really understand where future dividend cash will from, I’ll keep away. Full-year results are due on 25 June.

The post Can this UK stock really deliver a high 19% dividend yield? appeared first on The Motley Fool UK.

Let’s explore this by doing some maths.

An investment of £10,000 in a stock yielding 16.5%, would generate dividends of £1,650 in year one. Assuming the amount received was reinvested, income of £1,922 would be earned in the second year. Repeat this for another 18 years — a process known as compounding — and the investment pot will have grown to £212,089. At this point, the company will be paying annual dividends of £34,995.

This shows that, in theory, it’s possible to take a relatively modest lump sum and use it to generate a very healthy level of passive income. Yes, it’ll take a couple of decades but as they say, Rome wasn’t built in a day.

Is this really possible?

While such high returns are unusual, they do exist.

For example, based on the dividends it’s paid over the past 12 months, Liontrust Asset Management (LSE:LIO) is currently yielding 16.5%.

However, like most shares offering a double-digit yield, this figure needs to be treated with caution.

For the past three financial years, the specialist fund manager has maintained its dividend at 72p a share. Indeed, it looks as though this run will be extended to a fourth, when its results for the year ending 31 March 2025 (FY25) are declared.

However, the generous yield indicates a problem that’s been around for a while now. Namely, that the company’s share price keeps falling. Since its peak in September 2021, it’s down 81%.

And this fall has boosted the yield. At the end of FY22, it was 5.6%. As the stock price continued to fall – and the dividend remained unchanged – the return soared. It was 7% at the end of FY23, and 10.7%, a year later.

Buyer beware

This is a good example of why shares apparently promising high levels of passive income need to be treated with caution.

And in my opinion, the reason why Liontrust’s value is declining is because its assets under management (AuM) are getting smaller.

The company makes money by managing funds on behalf of its clients. But as the table below shows, its AuM have fallen during each of its last four accounting periods. If the funds acquired from buying other companies are removed, the position looks even worse.

And if this trend persists, I think it’s inevitable that the dividend will be cut.

However, the company’s chair appears to interpret events differently to me. He confidently asserts: “The underlying business is in better health than it has ever been with regards to investment proposition, quality of people, reach of sales and marketing, and strengthening business infrastructure.”

If challenged, no doubt he’ll point out that the company’s profitable — it reported earnings per share of 13.67p for the first six months of FY25. But with this level of performance, it remains a puzzle to me how a dividend of 72p can be maintained. And I fear if it’s cut, there’ll be a major knock-on effect on the company’s share price.

For this reason, I don’t want to invest, despite the attractive dividend on offer.

The post Could this 16.5%-yielder turn £10,000 into annual passive income of £34,995? appeared first on The Motley Fool UK.

The company in question is Liontrust Asset Management (LSE: LIO). As the name suggests, it operates as a specialist fund manager.

The back-story for the sector is that managed funds in general have endured a tough time because of negative sentiment among investors. That’s led to a steady leak of people pulling money out of managed funds.

Poor figures

So today’s (26 June) full-year results report from Liontrust looks like a bit of a slow-motion car crash of negative percentage figures where we’d all like to see positive ones.

Long-suffering shareholders have endured a terrible time as the chart shows:

But there’s a note of optimism in the outlook statement. The directors expect sentiment in the investing community to improve, especially if interest rates start to ease back.

If rates fall as hoped, it’s likely the environment for businesses, stocks and shares will improve. That may mean we’ll see an enduring period of prosperity and a steady bull market ahead. Although such positive outcomes are not certain, of course.

Nevertheless, as mentioned, the directors backed up their optimism by keeping that all-important shareholder dividend at last year’s level. I reckon that speaks well of the quality and value in the underlying business.

If they can repeat the trick for the current trading year to March 2025 as analysts predict, the forward-looking yield is now compelling – at least to me. With the share price near 732p, it’s a whisker above 9.8%.

Value and opportunity

However, to get that dividend income flowing into my portfolio, I’d need to embrace the risks and uncertainties here. One of them is that the company is small with a market capitalisation of just below £488m.

Another risk is the possibility that negative investor sentiment may never return for managed funds. It’s well-known that many – perhaps most – managed funds tend to underperform their benchmarks. So, there’s a growing movement of investors opting for low-cost, mechanically managed tracker funds instead. On top of that, the internet has made do-it-yourself stock-picking and investing accessible and cost-effective for all.

By 31 March 2024, the firm’s indicator of ‘assets under management and advice’ (AuMA) decreased by 11.5% compared to the prior year.

Nevertheless, chief executive John Ions said Liontrust has an expanding and “compelling” range of investment teams with robust processes. The brand is “strong”, and Ions is confident the business has a platform capable of delivering growth.

Value-style opportunities like this never look that great when examining the figures in isolation. But that’s why the value often arises in the first place.

Sometimes, it’s darkest just before the dawn. In this case, we may see the business recovering in the months and years ahead. So I’m rolling up my sleeves and getting stuck in with further and deeper research.

The post Dividend held! An almost 10% yield makes this UK value stock look interesting appeared first on The Motley Fool UK.

Investing in stocks and shares doesn’t require a huge sum of money to get started. And there aren’t many other asset classes that have been known to provide the same long-term returns that equities do.

Even with as little as £3,000 invested today, I could work towards securing myself a second income of £500 a month to spend as I wish. Here’s the method I’d use to do it.

Lay the foundations

First, I’d choose the best investment account to ensure I get to keep the most of my profits. All brokerages charge fees so it’s always best to shop around for the cheapest one. But the best way to reduce outgoings is with a Stocks and Shares ISA. It allows investments up to £20,000 a year without paying any tax on the gains.

A Self-Invested Personal Pension (SIPP) is another great investment account with tax benefits. Depending on earnings, it allows up to £60,000 a year of tax-free investments.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Choose the right shares

With an account chosen, it’s time to get down to the real action — picking stocks. There’s a wealth of great dividend-paying shares on the FTSE 100 and FTSE 250. These types of shares regularly pay out a percentage of profits to investors, on top of any gains from price growth. This is a great way to aim for reliable, long-term returns. 

A good example to consider is Liontrust Asset Management (LSE: LIO), a London-based investment manager. It boasts an impressive dividend yield of 9.4%, currently paying out 72p per share. What’s more, the yield has been steadily increasing over the past 10 years, from 1.6% to a high of 11% last year.

Sadly, the share price took a huge hit in the past two years as inflation decimated the economy. After growing 1,000% between 2010 and 2020, an increase in client withdrawals dragged the price back down to pre-pandemic levels.

Now it looks like it might be ready to surge again.

Fresh inflows into its European dynamic fund helped its Assets under management and advice (AuMA) nearly double to £1.4bn last quarter. The share price has now recovered 27.2% already this year and looks set to continue as the wider economic situation improves.

Calculating returns

If the dividend yield continues to grow at the current rate and the share price provides 5% annual returns, what gains can I hope for from £6,000? Well, if I held the shares and reinvested the dividends for 11 years, I could expect it to grow to £41,340. At that point, it would pay annual dividends of £6,162 — slightly more than £500 per month in passive income.

Of course, there’s no guarantee that those figures will hold. This is why I would spread my investment over several similar dividend-paying shares. That would protect me from a single failure and provide a better chance of achieving my goal. Remember: dividends aren’t guaranteed — a company can choose to cut them at any time. 

Diversification is key to a resilient passive income portfolio!

The post £6,000 in savings? Here’s how I’d try to turn that into a £500 monthly passive income appeared first on The Motley Fool UK.

Our monthly Ice Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of income-focused Ice recommendations, to help Fools build out their portfolios.

• Liontrust is a fund manager that, despite seemingly a historically well-run business, has struggled with client withdrawal in recent years.
• Assets under management and advice (AuMA) were flat quarter on quarter to Q4, though it saw an 11.5% decrease yar on year to £27.8bn.
• Though pleasingly, there have been inflows into some of its funds, including the European dynamic fund, which saw AuMA nearly double to £1.4bn in the last quarter.
• While this remains a relatively fallow period for Liontrust, it continues to invest in technology infrastructure, with a desire to improve efficiency and create a better client experience.
• Most of its client money is invested in the UK market, which is suffering from negative investor sentiment, though I’d argue investors aren’t pricing in a strong likelihood of a recovery for Liontrust.
• If ongoing negative sentiment eventually turns positive (perhaps helped by falling interest rates and improving investment performance), investors might enjoy strong capital returns, and until then they can collect a 9.5% forward yield.

The post Just released: our 3 best dividend-focused stocks to consider buying before July [PREMIUM PICKS] appeared first on The Motley Fool UK.

Barclays

What it does: Barclays is a well-known Tier 1 bank, serving both private and corporate clients around the world.

By Jon Smith. I bought Barclays (LSE:BARC) shares in January for several reasons. The stock is down 22% over the past year, putting it in undervalued territory in my eyes. With a price-to-book ratio of 0.33, I believe the share price is too low. When I compare it to the latest earnings, the price-to-earnings ratio of 4.73 again looks cheap.

Another factor is the restructuring, with a £1bn cost cutting drive announced late last year. An update on this is due this month. It shows to me the management team are aware of the problems and are making drives to push for greater efficiency going forward.

A risk is that Barclays continues to underperform peers, and remains undervalued for years to come. It’s true that I might have to be patient here before we get a rally, but I’m confident that the long-term direction is higher.

Jon Smith owns shares in Barclays.

BP

What it does: BP is an international oil and gas company and one of the largest businesses in the world measured by revenues and profits.

By Charlie Keough. I’ve been tracking BP (LSE: BP.) in the last few months. While it’s endured a tough period in the last year or so, I’ve decided to take the leap and open a position.

There are a few reasons for this. Firstly, I think its shares now look too cheap to ignore. Trading on just 4.2 times earnings, that’s considerably lower than the FTSE 100 average.

On top of that, I’m also keen on its 4.8% yield. That’ll provide me with some solid passive income. It’s forecasted its dividend will rise in 2024 and 2025.

I’m aware of the risks surrounding BP. The energy transition poses a major threat to the business. Governments across the globe have been pressing for a greener world.

However, it’ll be some time before we aren’t reliant on traditional products. What’s more, BP is adopting sustainability measures to ensure it’s a company that aligns with future trends. In the weeks to come, I’m eager to continue buying cheap BP shares. 

Charlie Keough owns shares in BP.

General Motors

What it does: General Motors is a US automotive company that owns and manufactures car brands such as Chevrolet and GMC.

By Muhammad Cheema. General Motors (NYSE:GM) is performing very well at the moment. It recently announced quarterly revenue and earning beats as well as great forward guidance.

It’s guiding for earnings per share (EPS) to grow from $7.68 last year to between $8.50 – $9.50 in 2024. This is quite impressive considering the increased costs associated with new union contracts it took on towards the end of last year to end the worker strikes.

Despite this, the stock is trading at incredibly cheap levels. Its forward price-to-earnings (P/E) ratio is only 5, compared to an average of 20 across US automakers.

However, in an unfortunate event, one of the self-driving cars from its subsidiary, Cruise, recently dragged a pedestrian thrown into its path. This has caused regulatory and reputational troubles.

But I believe Cruise will recover from this in the long term, with the potential to become a major catalyst and growth engine for General Motors.

Muhammad Cheema owns shares in General Motors.

Liontrust Asset Management

What it does: The company is an investment house that allows its fund managers to use their own specialised asset strategies.

By Oliver Rodzianko. I recently bought Liontrust Asset Management (LSE:LIO) shares; I think it’s one of the most unique investments I’ve made.

Its high 12% dividend yield sold me. While this isn’t likely to last, it convinced me the shares had a place in my portfolio at this time.

I consider the investment significantly undervalued, selling at a price around 75% below its all-time high.

I always look for stability when I invest. But while Liontrust has £131m in cash and just £4m in debt on its books, it had an over 25% decrease in its earnings growth in the last year.

Therefore, there’s a risk that Liontrust shares could make for a volatile ride. However, it seems to balance this with nice dividend payments if things go south.

Three years ago, I wouldn’t have bought this. But at the current valuation, it’s worth me owning to see how things unfold. 

Oliver Rodzianko owns shares in Liontrust.

QinetiQ

What it does: QinetiQ develops scientific and technological solutions used by international security and defence forces.

By Mark David Hartley. QinetiQ (LSE:QQ.) is a £2bn up-and-coming UK defence contractor competing for a place in the FTSE 100. Unlike major UK defence contractor BAE – known for artillery and combat vehicles – QinetiQ focuses on advanced robotics and drones. 

Admittedly, it’s had a rocky start to the year. 

Its recent 1H 2024 earnings report revealed lower-than-expected earnings per share (EPS), down to 11p from 19p. It also reported decreases in both net income and profit margins compared to 1H 2023. (To combat this, it plans to buy back £100mln of shares).

But I believe the escalating conflicts in Ukraine and the Middle East will increase demand for QinetiQ’s products in 2024 – and I’m not alone. Even after five years of consistent growth that saw a 20% share price increase, analysts estimate QinetiQ shares are still undervalued by almost 45%. 

Combine this with a low price-to-earnings (P/E) ratio of 19.3 times, and I expect QinetiQ will see growth in 2024.

Mark David Hartley owns shares in QinetiQ.

Primary Health Propeties

What it does: Primary Health Properties is a real estate investment trust that owns health centres in the UK and Ireland.

By Stephen Wright. I’ve been buying shares in Primary Health Properties (LSE:PHP), a FTSE 250 real estate investment trust (REIT). The immediate reason is simple – the stock has been going down.

The stock had risen sharply as investors were optimistic about the idea of an imminent cut in interest rates. But things have gone back the other way since then.

Shares in Primary Health Properties have fallen back below £1 and the dividend yield is back above 7%. With a 10-year government bond offering 4%, that looks attractive to me.

In an election year, investors shouldn’t ignore the risk of a change in government causing a shift in NHS spending (which accounts for 89% of PHP’s rent). But I think it’s worth it at today’s prices.

Ultimately, I think the company will be able to maintain its dividend for the foreseeable future. And at today’s prices, the dividend looks attractive to me.

Stephen Wright owns shares in Primary Health Properties.

Ramsdens Holdings

What it does: Ramsdens offers foreign currency exchange, pawnbroking loans and jewellery buying and selling in 162 stores.

By Ben McPoland. I recently topped up my holding in pawnbroker Ramsdens Holdings (LSE: RFX). The share price has struggled in recent months, falling around 20% since the summer. This means the stock is trading on a P/E ratio of 8 with a forward dividend yield of 5.8%.

For the 12 months to the end of September, revenue rose 27% to £83.8m and the company achieved a milestone pre-tax profit of more than £10m. Meanwhile, its active pawnbroking loan book increased by almost 20% to £10.3m. The full-year dividend was lifted by 16%. 

Unfortunately, management said Q1 (which ended 31 December) was a bit slow and staffing and energy costs are rising. This adds a bit of risk to the near-term outlook.

Yet brokers still see revenue growing to around £94m by the end of next September. And the dividend is well-covered, with the firm planning to up its payout ratio to 50% from 42%.  

Meanwhile, the high gold price is a positive for its pawnbroking and precious metals buying operations. All in all, I think the shares are undervalued.  

Ben McPoland owns shares of Ramsdens Holdings.

Scottish Mortgage Investment Trust 

What it does: Scottish Mortgage is an investment trust with a focus on high-growth, disruptive technologies companies. 

By Edward Sheldon, CFA. This year, I have been adding to my holding in Scottish Mortgage Investment Trust (LSE: SMT). 

This trust has had a bad run in recent years as interest rates have risen and disruptive tech stocks have fallen out of favour. However, the share price is now rising again. And I think it may continue to climb as rates come down. 

Looking at the trust’s portfolio, I like the holdings. At the end of 2023, the top 10 holdings included ASML, Nvidia, Amazon, and SpaceX (which is unlisted). These companies all have a lot of potential. 

One other thing I like about this trust is that it’s currently trading at a double-digit discount to its net asset value (NAV). In other words, I’m getting exposure to these growth companies at a substantial discount. 

Now, I’ve always said that this is a higher-risk trust. I expect it to be volatile. I’m comfortable with the risks though. Even after my recent purchases, it’s still a relatively small part of my overall portfolio. 

Edward Sheldon owns shares in Scottish Mortgage Investment Trust, ASML, Nvidia, and Amazon. 

The post 8 shares that Fools have been buying! appeared first on The Motley Fool UK.

Where’s the spark?

Q3 results out at the beginning of the week (5 February) did nothing to rouse my interest in the FTSE 100 juggernaut.

To be fair, I don’t think they were that bad. While continuing to struggle in some of its markets, notably Spain and Italy, it’s managing to grow revenue in others such as the UK and Turkey. Besides, we know that Vodafone is in the process of offloading its poorer-performing businesses.

The problem is that I still can’t see a catalyst big enough for the share price to reverse direction, especially given the humungous amount of debt the company carries.

In the meantime, this year’s dividend looks unlikely to be covered by profit, which means the telecommunications giant may be forced to revise its distributions before long.

That’s hardly a signal for me to get involved and it looks like others feel the same. Tellingly, Vodafone doesn’t feature anywhere near the top of the best buy lists on various investment platforms.

Another 11%-er

Liontrust Asset Management (LSE: LIO) is arguably even more hated. Who wants to invest in a fund manager when general market sentiment for all but the biggest US stocks has been on the floor for so long?

Indeed, the firm’s latest trading update was far from encouraging. Net outflows rose to £1.7bn in the three months to the end of 2023 as investors ruminated over numerous macroeconomic and geopolitical headwinds. It was £1.6bn in the previous quarter.

What’s interesting, however, is that Liontrust shares offer roughly the same forecast yield as those of Vodafone.

So, why would I be more inclined to buy this stock?

Ready to roar

Well, Liontrust’s prospects should improve if and when we see the beginnings of the next bull market. With renewed confidence, investors should begin throwing money back at the very managers and funds they were once so keen to exit. This is assuming that they’re willing to overlook last year’s failed takeover of Swiss firm GAM Holding AG and the costs that came with it.

In the meantime, the monster yield is sufficient compensation for being patient. The mid-cap’s payout is at least expected to be covered by profit. Moreover, its balance sheet looks far more robust with a net cash position.

Sure, I need to be wary of making comparisons between two very different companies. And yes, Liontrust could still be forced to cut its payout if the market continues to stutter. So, spreading my cash around is still a must.

Value trap

Perhaps I’m wrong. Maybe Vodafone will multibag from here. Perhaps we have truly reached the point of maximum pessimism.

But I just can’t see it, at least based on the information and data I have before me. When a stock behaves like a dog for so long, maybe it’s just a dog.

If forced to choose between these two 11%-ers for passive income, I know where I’d be more comfortable storing my cash.

The post I’d shun Vodafone’s 11% yield and buy this dividend stock for passive income instead appeared first on The Motley Fool UK.

Liontrust Asset Management (LSE:LIO) looks like a very worthy contender indeed.

It has a yield of 12% and has made no reductions to its dividend payments in 10 years.

Now, before I get ahead of myself, there’s one big caveat with this investment. Its share price is down over 75% from its all-time high.

However, with a value investor’s mindset, that could spell a further opportunity.

A beaten-down share price means it could rise over time if the financials support its growth.

What does the company do?

Liontrust is an established UK investment management company that allows its fund managers to trade operating according to their specific views and special expertise.

The firm has also made multiple acquisitions.

For example, it bought North Investment Multi Asset team and portfolios in 2013, Alliance Trust Investments in 2017, and Majedie Asset Management in 2022.

These acquisitions diversified Liontrust’s offerings and increased its areas of expertise to better serve its clients.

What I like about the shares

Other than the dividend yield and the low share price, the company has other promising elements.

For example, its revenue has been increasing steadily over time, averaging 14% growth over the last three years.

In addition, it has a strong balance sheet.

As of its last annual report, it had £131m in cash and only £4m in debt. If it can keep that up (which isn’t guaranteed, of course), I’d sleep well at night holding Liontrust shares.

Also, there’s further evidence it could be undervalued. Its price-to-earnings ratio based on future estimates is just 8.

So, the shares look cheap and stable to me, with the potential to grow and a hefty dividend yield. What’s not to love?

A look at the risks

As with all investments, buying Liontrust shares could mean I face considerable problems.

For one, its net margin is an uncompetitive 7.5% at the moment. If it fails to improve that, the shares might not grow substantially over time.

In addition, the company is currently paying 2.7 times its earnings in dividends. Arguably, that’s not sustainable for much longer.

That’s why I won’t be making this investment solely based on the passive income. There are plenty of other reasons why the shares look attractive to me that are likely to still stand if the dividend returns to a more ordinary level.

I think I’m sold

This is an unusual situation with a company paying a remarkably high dividend. It’s clearly not going to last forever.

However, with such a low share price and strong financials, the stock is worth me owning, even putting the yield aside, in my opinion.

That’s why I’ll be looking at buying these shares in February. They’re too good for me to pass up unless something even more appetising grabs my attention.

The post With a 12% yield, I think this potentially undervalued dividend stock is amazing appeared first on The Motley Fool UK.

I could see myself dedicating a year’s Stocks and Shares ISA cash to the smaller index. And if I could invest the full ISA allowance, these three would be candidates.

Investment

Liontrust Asset Management (LSE: LIO) has a forecast dividend yield of 11.6%.

I’m wary of such a big yield. And I do think there’s a chance it could be cut. Still, analysts have it steady between now and 2026, even if I might not quite share their confidence.

Liontrust suffered after the wheels came off its acquisition strategy, and that will have hurt sentiment. And investors can be fickle when it comes to second chances.

But forecasts show earnings slowly rising in the next few years, with the price-to-earnings (P/E) ratio coming down to under 10.

The dividend might not be covered by earnings. But even if we have a cut, we could still see a very attractive yield.

Bank

OSB Group (LSE: OSB) offers a dividend yield of 9.7%. And forecasts show it climbing as high as 12.5% by 2025.

What’s more, the City seems to think the cash will be well covered by rising earnings. So why do the shares look so cheap?

I mean, we’re talking about a P/E of 5.2, dropping to under three by 2025. That’s either a steal… or there’s some very big risk here.

Actually, I think it might be both. OSB is a specialist mortgage lender, active in the buy-to-let sector, among others. I can see why investors might not be so keen on that right now.

But if it can get through the mortgage crisis, I think OSB could make a nice addition to a second income portfolio.

REIT

The real estate panic won’t be doing a lot for Supermarket Income REIT (LSE: SUPR) either.

It’s a real estate investment trust, and it does what its name says. It invests in supermarket properties to earn a rental income stream for its shareholders. And, unsurprisingly, the market has not been kind to the REIT‘s shares in the past 12 months.

But the weakness has pushed the expected dividend yield up to 8.1%.

As an investment trust, it can use cash from better years to keep the dividend going in weaker years. And this year should be weak, with a loss on the cards.

But the City expects there’ll be a bounce back in 2024, and a restart of earnings and dividend growth.

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Income

These three combine for an average dividend yield of 9.8%. At that rate, if I buy more shares with the dividends each year, I could end up just a few pounds short of £51,000 in 10 years.

And at the same return, that could generate my second income of £4,992 per year.

These are risky dividends though. So things could vary a lot. But I think it shows that we could earn good long-term income from UK dividend stocks.

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