Despite a recent rally, stocks are still well down from where they started the year. Lower share prices mean higher dividend yields, which is good news for investors like me who are seeking passive income.
As a result, there are a number of stocks that I think are materially undervalued at the moment. Here are two passive income stocks that I’d buy with £1,000 at today’s prices.
Greggs
The first passive income stock I’d buy right now is Greggs (LSE:GRG). Until recently, I wouldn’t have thought of Greggs as a passive income stock. But the share price has fallen by around 45% since the start of the year.
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As a result, Greggs shares currently pay a dividend of just over 3%. That’s brought me to start seeing it as an interesting passive income stock.
I also think the stock is significantly undervalued. As of right now, shares have a price-to-earnings (P/E) ratio of around 16. Given the state of the underlying business, I think that’s very reasonable. Revenue and income have recovered well from a pandemic-induced slowdown.
The risk with Greggs is the possibility of a recession. But even in a difficult economic environment, I think that Greggs will continue to do well.
In my view, consumers might wel delay expensive purchases such as a new car or a house extension. But I think everyday smaller purchases – such as buying lunch at Greggs – will hold up well.
If I’m right about that, then the stock is substantially undervalued right now. With £1,000 to invest in passive income stocks, I’d be happy putting half of it into Greggs shares.
JPMorgan Chase
The other stock is US bank JPMorgan Chase (NYSE:JPM). The JPM share price has fallen by around 28% since the beginning of January. As a consequence, the stock has a dividend yield of 3.5%.
I think that JPM shares are materially undervalued at the moment. The stock currently trades at a P/E ratio of around nine, which is well below its historic average of 12.
By itself, that doesn’t mean that JPM stock is a bargain. The stock is down at the moment because of fears about a recession in the US.
Unlike Greggs, I think that JPMorgan’s business is likely to suffer in a recession. In my view, however, the current share price more than compensates for that risk.
The bank recently passed a stress test, indicating that it is in good financial shape. Furthermore, CEO Jamie Dimon has been saying for some time that the company is getting ready to deal with a difficult economic period.
As a result, I’d be happy to allocate half of my £1,000 to JPMorgan shares right now.
Passive income
Investing £500 into Greggs shares and £500 into JPMorgan shares gives me a reasonably diversified pair of investments that I anticipate generating around £32.50 in annual passive income. I intend to grow that income by reinvesting the dividends that I receive.
Of course, dividends are never guaranteed – but I think that the dividends that each company distributes will increase over time. As Greggs grows its business and economic conditions become more favourable to JPMorgan, I anticipate getting more and more passive income from these two stocks.
