Last weekend, I looked at how an investor might generate a passive income through saving £25 a week (or £1,300 a year). Today, I’m turning my attention to which stocks to buy with this money. And thanks to Mr Market’s mood souring over recent months, I think there’s no shortage of dirt-cheap options out there.
Passive income…on the cheap
Online trading platform CMC Markets (LSE: CMCX) is a great example of just how fickle investor sentiment can be. Prior to the Covid-19 outbreak, its stock traded for pennies rather than pounds.
Following the huge increase in online trading over multiple UK lockdowns however, the very same shares were changing hands for as much as 559p a pop by April this year. Fast forward to today and the price has more than halved from this peak, as investors have rushed to bank gains following more “subdued” market activity over the summer.
Despite this rocky ride, I think CMCX could be a great choice for passive income-seeking investors. Right now, analysts are predicting the company will return 10.6p per share to owners in the current financial year (ending 31 March). Using today’s price, that’s a 4% yield. This should also be covered well over twice by expected profit, making the payout secure (at least for now).
CMC’s stock also looks inexpensive to pick up, with the company trading at just 11 times forecast earnings. Why is this company so cheap if it’s such good quality you may ask? I suspect a lot of it is due to CMC operating in an industry that’s susceptible to regular meddling from regulators. Larger peers trade on similarly low valuations. With its purple patch likely over, traders will also be looking for other opportunities to grow their capital at a faster clip.
Not that this would bother me if generating income were my primary goal. With its solid finances, I’d be happy to add CMCX to my passive portfolio today.
Chunky 5.4% yield
A second passive income candidate that’s looking cheap to me is fund manager Polar Capital Holdings (LSE: POLR). Its shares can currently be snapped up for less than 13 times expected earnings, and yield a chunky 5.4%. That’s despite the stock rising a little over 40% in value over the last 12 months as profits at the mid-cap company have surged.
Again, there’s are a few things worth bearing in mind. In contrast to the possibility that CMC will likely see more trading from clients as market volatility increases (as it has in September), POLR might see the complete opposite as investors reduce their equity exposure. This means the Polar Capital share price could get cheaper in the months ahead. It could also mean that dividends may not rise as quickly as they have in recent years.
As a Foolish investor, all this is nothing new. I know it’s near impossible to consistently predict the market’s next move. Rather than worry, it’s best to assume that no dividend stream is ever safe and diversify accordingly. That means spreading my money around a reasonable number of stocks from various sectors.
That said, I sincerely doubt POLR will stop paying out income soon, even if dividends aren’t covered quite as well by profit. Like CMCX, it also looks to be in robust financial shape with a substantial net cash position.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Polar Capital Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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