Following the outbreak of the latest market correction, income stocks were hit hard, sending dividend yields through the roof. Today, the economic landscape’s improved. Yet, many UK shares continue to trade at depressed valuations. As such, there are now roughly 90 companies in the FTSE 350 paying a dividend yield of 5% or more.
In other words, over a quarter of the largest companies on the London Stock Exchange are paying more than the average 4%. And capitalising on these opportunities could lock in an impressive passive income stream for prudent investors.
Walk, don’t run
With interest rate cuts expected to arrive later this year, time may be running out to snap up these bargains. After all, a drop in the cost of capital can send valuations flying. However, not all of these dividend-paying companies are made of gold. And rushing into a poorly-researched investment can lead to disasterous consequences for a portfolio.
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It’s important to remember that while corrections present rare buying opportunities, there are always bargains to be found. So investors shouldn’t be motivated to act based on the fear of missing out. Instead, a calm, disciplined approach to analysing stocks to buy should be employed.
Don’t forget dividends aren’t guaranteed. These payments are made from a firm’s excess earnings as a way to return capital to the owners of a business (the shareholders). Therefore, should profits or, more importantly, cash flow become disrupted, a high yield might be ultimately worthless. And it’s up to individual investors to determine the risks as well as the potential rewards.
An income opportunity in 2024?
Free cash flow generation is a critical factor in the affordability of dividends. A firm that can consistently maintain or preferably expand its underlying operating income even after expenses is one of the best signals for a robust income stream. And when it’s paired with a high dividend yield, then it can make for a lucrative investment.
That’s why Big Yellow Group (LSE:BYG) has caught my attention. The firm’s the second largest self-storage operator in the UK. It’s certainly not the most exciting enterprise on the stock market. But, with more businesses and households becoming reliant on external storage facilities, the company’s proven to be a cash flow generating machine. So much so that it’s actually hiked dividends for 13 consecutive years!
Lately, the stock has suffered a bit of a blow on the back of interest rate hikes that have adversely impacted the carrying value of its real estate. And with the ongoing cost-of-living crisis pushing companies and individuals alike to cut costs, the group’s occupancy has also started to shrink from 80.4% in December 2022 to 77.6% today.
This drop’s obviously a concern. But it seems to be an industry-wide phenomenon rather than a specific problem with Big Yellow. And with the economic landscape set to improve as we move into 2025, I’m optimistic these figures will reverse as the business cycle ramps back up again.
That’s why I think investors may have discounted this business a bit too much. And if I’m right, investors could be looking at a terrific income stock to consider snapping up ahead of a rebound.
