Many UK dividend shares pack a powerful passive income punch. However, a stock’s valuation can often be just as important as its yield for an investor’s total return. Share price gains matter in dividend investing too.
That’s why I’m looking for undervalued high-yield stocks that could beef up a portfolio’s passive income potential while simultaneously offering capital growth opportunities.
These companies are strong candidates worth considering.
Investec
First, there’s FTSE 250 specialist banking group and wealth manager Investec (LSE:INVP), which has a significant presence in South Africa and the UK.
The Investec share price has skyrocketed 235% over five years, and the stock also offers a chunky 7.1% yield on top. Despite those gains, the valuation’s still appealing. The stock’s price-to-book (P/B) ratio is under 0.6.
Beyond the yield, dividend sustainability’s another crucial consideration for passive income investors. On this front, Investec shares shine. The dividend’s well-covered by 2.2 times forecast earnings, providing a wide margin of safety.
Business for the lender is ticking along nicely. Investec expects pre-provision adjusted operating profit to fall between £1.01bn and £1.08bn in its FY25 results due to be published on 22 May. That would be comfortably ahead of last year’s £963.6m figure.
However, falling interest rates could hurt the group if its loans become less profitable. That’s a risk to bear in mind, but I still think the overall investment case looks robust.
WPP
FTSE 100 advertising and communications giant WPP (LSE:WPP) is another stock that delivers a healthy passive income stream. It currently yields 6.6%.
Unlike Investec, WPP’s showing some obvious signs of weakness. In FY24, net revenue and underlying operating profit both went into reverse gear, falling by 1% and 2.5% respectively. The trend has continued in the first quarter of this year, amid a slump in advertising demand. This is an ongoing worry for investors.
But, at 593p today, WPP shares could be a potential bargain to consider. The stock’s rarely traded below 600p since the 2008 financial crisis. Furthermore, with a forward price-to-earnings (P/E) ratio around 6.6, the valuation appears attractive today.
Artificial intelligence (AI) could bring significant growth opportunities to the communications industry. WPP’s ploughing cash into the technology to stay ahead of the game. As one of the largest players in the sector, the company’s well-positioned to establish a competitive advantage in AI if it makes the right investments.
ZIGUP
Finally, FTSE 250 mobility solutions business ZIGUP (LSE:ZIG) may also have plenty to offer dividend investors thanks to a whopping 7.8% yield.
From commercial vehicle rentals to repairs and maintenance, ZIGUP’s services cover the full automotive lifecycle. The firm’s interim results were a mixed bag. Revenue improved 5.6%, but pre-tax profit took a big hit, declining 17.2%, dragged down by lower van prices.
Nonetheless, a forward P/E multiple around 6.5 suggests this could be another value investment opportunity to chew over. An expanding fleet — now 132,500 vehicles strong — bodes well for future growth. The 6% dividend hike to 8.8p per share will also be welcomed by passive income seekers.
Granted, net debt of £782.5m looks high compared to the company’s £756.6m market cap. Balance sheet weakness is a risk to contend with, but there’s a lot to like about this dividend stock too.
