Image source: Getty Images
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.
I’m always on alert to find undervalued growth and dividend shares to buy. And I believe recent significant stock market volatility gives me a chance to add quality stocks to my portfolio at little cost.
These top income stocks have experienced sustained share price pressure recently. In fact they’ve fallen by 20% or more in value during the past three months.
Here’s why I’m looking to buy them when I have spare cash to invest.
Higher interest rates have pulled real estate investment trusts (REITs) like Warehouse REIT (LSE: WHR) lower in 2023. They’ve raised investor concerns over the cost of expanding estate portfolios, and yanked the valuations of the REIT’s properties lower.
This particular property stock has dropped 23% in value since mid-May. And so it now trades on a forward price-to-earnings growth (PEG) ratio of just 0.9. Any reading below one indicates that a stock is undervalued.
Warehouse REIT shares also carry a 7.9% dividend yield today. REITs must pay at least 90% of annual rental profits out in dividends in exchange for certain tax perks, which in part reflects that large yield.
I expect profits here to rise strongly over the long term. So I consider recent share price weakness as an attractive dip buying opportunity. Demand for warehouses and logistics hubs are set to soar over the next decade thanks to the growth of e-commerce, data centre expansion, and changes to supply chain management following the pandemic.
The FTSE 250 company is already thriving as new property supply fails to keep up with demand. Like-for-like rental growth has more than doubled in the past three financial years, coming in at 5.3% for the 12 months to March.
A weak pipeline of fresh storage and distribution assets suggests rents should keep marching higher over the next few years at least.
Water companies like Pennon Group (LSE:PNN) have sunk in value as criticism over their environmental impact, their record of investment, and the amount they charge customers has grown.
Utilities operate in a highly regulated landscape, so the threat of earnings-restricting action is never far away. But the landscape is especially dangerous today given the scale of current complaints.
Having said that, I’d argue that the threat of industry change is reflected in Pennon Group’s low valuation. The FTSE 250 share — which has fallen 24% in value during the past three months — trades on a forward PEG ratio of 0.4.
I think water suppliers like this still have terrific investment appeal. Unlike many UK shares, the company doesn’t have to worry about falling demand for its services as the economy struggles. So it should continue to generate solid cash flows that will help it pay more big dividends.
I also like Pennon Group because of its high barriers to entry. Another water company can’t just set itself up and steal its customers, which gives long-term profits forecasts even more protection.