These beaten-down dividend stocks look like a bargain at current prices. Here’s why I’m thinking about snapping them up for a second income next year.
The PRS REIT
2023 has been a tough year for real estate investment trusts (REITs). Soaring interest rates have pushed their share prices lower as borrowing costs have increased and net asset values (NAVs) have toppled.
Further rate hikes could be in store during the short term. But signs UK inflation is moderating suggests now could be a good time to buy some of these beaten-down property stocks. The PRS REIT (LSE:PRSR) is one on my radar.
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Its share price has risen recently on speculation that the Bank of England will cease its rate tightening cycle. Yet this small-cap stock still carries exceptional value on paper.
It trades on a price-to-earnings growth (PEG) ratio of 0.5 for the current financial year (to June 2024). A reminder that any reading below 1 indicates a share is undervalued.
On top of this, PRS REIT today carries a healthy 5.1% dividend yield. This in part reflects REIT rules that dictate these firms must, in return for certain tax advantages, return at least 90% of yearly rental profits in the form of dividends.
Rental income here is soaring as supply shortages in the private residential rental sector worsen. Tenant costs are growing especially strongly in the family homes segment too, the area in which PRS REIT specialises.
According to rental services provider HomeLet, the average UK rent leapt 9.6% during the 12 months to October, to £1,283 a month. I’m expecting rental levels to continue climbing sharply too. Demand is steadily rising while supply is squeezed by weak housebuilding rates and a steady decline in buy-to-let properties.
National Grid
Power grid operator National Grid (LSE:NG) is another dividend hero on my shopping list for next year. The possibility of further interest rate rises are also a threat here. It could push the cost of servicing its large debt pile (which stood at £41bn as of March) higher.
But, on balance, I believe it’s an excellent stock to buy in these uncertain times. The services this FTSE 100 firm provides are in demand at all points of the economic cycle. So even if the UK economy remains weak in 2024 (as is widely expect), it can still expect to enjoy solid profits and cash flows, thus giving it the means to keep raising dividends.
City analysts share my optimistic view. They expect the annual dividend to rise 5% in this financial year (to March 2024), resulting in a bulky 5.9% dividend yield.
Further dividend increases tipped for the following two years push the yield to 6.1% too. With National Grid expanding its asset base to boost long-term earnings — its targeted asset growth of 8-10% on a CAGR basis through to 2026 — I expect dividends here to rise steadily for years to come.
