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When a stock’s value falls, several things can trigger it. First, it could be a cheap, undervalued stock. Second, the dividend per share makes up a larger portion of the stock’s price, which increases the dividend yield. For this reason, I’m always on the lookout for stocks worth buying when the price drops. Here are two I’ve discovered recently.
Man’s best friend
The first is Pets at Home Group (LSE:PETS). The stock has fallen 21% over the past year and the current dividend yield is 4.41%.
One reason for the share price drop is the investigation by the Competition and Markets Authority (CMA). The launch of the investigation into the veterinary sector is linked to concerns that sellers are overcharging for certain products. This includes Pets At Home, although no wrongdoing has been found so far.
In terms of financial results, the 2023 annual report was mixed. Revenue increased by 5.2% year-on-year. However, profit before tax fell by 13.7% due to higher costs.
I think the stock looks cheap as the latest update from early August shows the company is on track to increase its profits year on year. It looks to me like the management team is OK with this as they recently announced a £25 million share buyback program.
The results of the investigation represent a risk for the future. At the same time, however, if no abnormalities are found, they could contribute to an increase in the share price.
Investing in the future
Another idea is the Octopus Renewables Infrastructure Trust (LSE:ORIT). After a decline of 18% last year, the trust has increased its dividend yield to 7.70%.
As the name suggests, the management team focuses on investing in a diversified portfolio of renewable energy assets in Europe, the UK and Australia. By selling the proceeds from these assets, Octopus can generate high cash flow. On this basis, the company can pay regular quarterly dividends to its shareholders.
In the latest annual report, the share price decline was “the difficult macroeconomic conditions, which included falling electricity prices and a relatively poor wind year.” There is a risk that this trend will continue in 2024.
However, even with a decline in earnings per share in 2023, dividend cover was still at 1.18. A value above 1 means dividends are fully covered by recent earnings. That’s not massive coverage, but I think if the money can still be paid even in a bad year, everything is fine.
In the long term, renewable energies like wind are the future. I expect demand to increase in the future.
Add up the pounds
I am 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 continue to invest and also buy the shares with my subsequent dividends, this would grow quickly.
After a decade, my pot could be worth £78,676. That means it could pay me an average of £396 in income per month over the following year.
