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Investing in cheap shares is a great way to secure big future returns due to their significant growth potential. However, as the FTSE 100 flirts with new highs above the 8,000 point barrier, careful stock picking is arguably more important than ever.
I’ve been searching the UK’s blue-chip benchmark for value investment opportunities. There are two undervalued dividend stocks that I’d consider buying today if I had some spare cash to deploy.
The Footsie companies I’m referring to are Persimmon (LSE:PSN) and Schroders (LSE:SDR).
Investing in one of Britain’s largest housebuilders might not be an obvious choice in a year when house prices are expected to tumble. However, a 41% fall in the Persimmon share price over the past 12 months has pushed the company’s dividend to sky-high levels.
At 16.66% today, the stock now boasts the top dividend yield in the FTSE 100 index by a considerable margin.
A chronic lack of supply in the UK’s housing market means housebuilders have a crucial role to play in the future.
There’s a British penchant for home ownership. I think this should continue to act as a tailwind for housing demand and prices over the long term. In turn, that should provide support for the Persimmon share price in the coming years.
However, near-term risks cloud the outlook somewhat. A standoff between buyers and sellers could create conditions in which house building activity stagnates.
In addition, there are challenges posed by rising interest rates and rising building costs. Ultimately, the dividend could come under threat if the company’s cash flow takes a hit this year.
Overall, I view Persimmon shares as a fairly high-risk play at present. Offsetting the risks is a downtrodden valuation, seen in a price-to-earnings ratio of 6.15. This metric suggests today’s share price presents a bargain investment opportunity.
If I had some spare cash, I’d pound cost average by investing small amounts in the company’s shares at regular intervals to smooth out any near-term volatility.
This multinational asset management company has also underperformed over the past year. The Schroders share price declined 23% in the past 12 months. On the other hand, a strong dividend yield of 4.21% boosts the stock’s passive income appeal.
After a big fall, I think Schroders shares look cheap at present. But it’s important to look into the weeds first. The firm’s assets under management (AUM) slumped in the third quarter to 30 September 2022, from £773.4bn to £752.4bn. At first glance, this doesn’t look like good news.
However, much of the reduction can be explained by the £20bn fall in AUM for the group’s pensions solutions business. The primary cause behind this was the near collapse of the liability driven investment market that resulted from the disastrous ‘mini’ budget last year.
Thankfully, that financial instability is in the rear view mirror. Looking ahead, I think the asset manager’s focus on higher-margin asset classes, sustainability, and technology investments should help the stock continue its recent positive trajectory.
Granted, a stock market crash would likely diminish my hopes of a share price recovery. However, few companies are immune in such circumstances. With some spare cash, I’d invest in Schroders shares today.
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