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UK stocks haven’t been this cheap since the great financial crisis nearly two decades ago. The result is that many shares are currently sporting dividend yields in the 6%-10% range. To my eye, this presents an extraordinary opportunity to generate mouth-watering passive income.
Not just for next year or 2025, but potentially for life!
However, I’m also convinced some of these opportunities won’t always be there. So I’m taking my chance now.
Recency bias
In behavioral finance, recency bias is something that often causes investors to place greater importance on the most recent events or trends. It is a cognitive bias that works in two ways.
First, it can cause investors to get swept up in the latest market fad. Meme stocks or cryptocurrencies would be a good example here. As they surged, many assumed they would continue to just go up. Until they crashed, that is.
According to finance experts, recency bias is what often causes investors to buy high and sell low.
Second, and I’d say more importantly, it can cause investors to overlook stocks that have been performing poorly. That is, there is a mistaken assumption that shares that have underperformed recently will continue to do so indefinitely.
This is where I reckon the opportunities lie.
Seizing the yield
So, what am I targeting to try and take advantage?
Well, I’ve been buying financial stocks for a start. Legal & General shares, for example, are carrying a huge 8.9% dividend yield. The insurance and investment firm is well-run and generates plenty of cash, with a great track record of rewarding shareholders with rising income.
Based on today’s underperforming share price, Legal & General is forecast to yield 9.6% in 2024. Though possible, I doubt the stock will always yield nearly 10%. Whenever market sentiment and global economic forecasts improve, I fully expect the shares to be re-rated higher.
This is my favourite stock to aim for high-yield passive income right now.
A discounted trust
Beyond this, I’ve been focused on investment trusts trading at significant discounts. That’s because I think there have been some babies thrown out with the bathwater, so to speak.
To my mind, one is BBGI Global Infrastructure (LSE: BBGI). Shares in this FTSE 250 infrastructure firm are down 28% over the last two years.
The sector has sold off due to higher interest rates, which makes funding for infrastructure projects much costlier. And the shares are currently trading at a 13% discount to the value of the underlying assets.
Now, if interest rates do in fact stay higher for longer, the shares could drift lower. However, BBGI Global Infrastructure has next to no debt. And most of its 56 infrastructure assets are schools, hospitals, motorways, and fire and police stations.
Dividends can always be cut. But with the contracted revenue coming from a public authority or government, this makes the income far more reliable. Plus, it has inflation-linked contracts in place.
Due to the share price decline, the stock is yielding 6.1%. But once interest rates start to fall, I wouldn’t be surprised to see the shares rebound strongly, resulting in a lower yield.
This is why I’m currently saving some cash up to invest in BBGI Global Infrastructure shares. To me, it looks like a passive-income bargain hiding in plain sight.
