Stock market correction: time to create that £1,000-a-month passive income portfolio?
The stock market correction has been painful. But for investors hunting passive income, it might just be the opportunity they’ve been waiting for.
Here’s the thing about building a passive income stream from dividend stocks. The lower prices fall, the higher the yields go. And when those yields are reinvested (as any serious long-term investor should be doing), the magic of compounding starts to work in earnest.
A £500 annual dividend reinvested at a yield of 8% snowballs far faster than one reinvested at 5%. Over a decade or two, that gap becomes enormous. It’s not exciting or glamorous. It is however, remarkably powerful.
So while the headlines continue to scream about tariff wars and macro uncertainty, patient income investors might quietly be seeing a shopping window.
Taking a beating
Several high-quality dividend stocks have taken a notable beating since the trade war escalated, including mainstream names such as Standard Life and Legal & General. Both long-time stalwarts of the income investor’s playbook have drifted lower despite underlying businesses that remain fundamentally sound. That’s pushed their already-attractive yields even higher.
But it’s not just the household names worth examining. Lesser-known stocks, including TBC Bank (LSE:TBCG), Morgan Advanced Materials, and Bodycote, have also been caught in the crossfire, marked down in the broad sell-off despite dividend credentials that look compelling at current prices.
For example, TBC Bank’s down 15% since the war started in the Gulf. The forward dividend yield now sits at 6.9%. It’s a similar story at Morgan and Bodycote where the forward yields now sits at 5.7% and 3.8% respectively.
Could this be the moment to start building â or topping up â a portfolio designed to generate £1,000 a month in passive income? It might be. As billionaire investor Warren Buffett said: “Be fearful when others are greedy, and greedy when others are fearful”.
A deeper dive
TBC Bank remains one of my favourite opportunities in the current market. In the UK, I’ve been downsizing my positions in banks such as Lloyds and Barclays — and it was well-timed as they’re both well off their peaks. I think there’s also some AI-engendered credit risk here — white-collar job losses put pressure credit/mortgages etc.
However, there’s a degree of insulation from those risks in Georgia and Uzbekistan where TBC operates. Both economies are growing rapidly, driven by demographics and rising consumer spending rather than the kind of knowledge-economy jobs most vulnerable to automation. TBC’s also expanding its digital banking platform, Space, across the region â giving it a fintech growth angle that the market seems to be largely ignoring at current prices.
It’s also simply much cheaper than its peers in the UK, and even its main peer in Georgia. It trades at 5.3 times forward earnings and has a price-to-earnings-to–growth (PEG) ratio of 0.4. Coupled with a way-above average dividend yield, the valuation picture looks very compelling.
Risks? I’d be a fool not to admit that a prolonged Middle East conflict wouldn’t harm performance. Banks reflect the health of the local economy and Georgia’s geographical exposure to the conflict is obvious.
Nonetheless, I believe the undervaluation is compelling. It’s worth considering.
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James Fox has positions in Barclays Plc and TBC Group. The Motley Fool UK has recommended Barclays Plc, Bodycote Plc, Lloyds Banking Group Plc, and Morgan Advanced Materials Plc. 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.
