The share market can be a treasure trove of opportunities when there's negativity among investors. Lower prices mean better value opportunities, but it also pushes up the dividend yield on offer from ASX income stocks.
Let me show you what I mean.
If a company has a dividend yield of 5%, but then its share price drops by 10%, the yield becomes 5.5%. If the share price falls 20% then the yield becomes 6%.
What we've seen over the past year is inflation and interest rates pummelling various asset classes. Some areas of the share market haven't escaped that pain.
But, large share market declines don't happen very often, so I'd say this is a rare opportunity for investors to grab some businesses with much higher yields than they normally offer.
Here are some of the areas where I'm seeing ASX income stock opportunities.
ASX retail shares
In theory, higher interest rates are meant to push down the value of most assets.
But, many retailers have been particularly hit with the prospect of the economic situation hurting their sales and earnings.
However, while the short-term may be difficult, I think the valuation of some retailers means the yields could be very high, such as Adairs Ltd (ASX: ADH), Accent Group Ltd (ASX: AX1), Universal Store Holdings Ltd (ASX: UNI) and Nick Scali Limited (ASX: NCK).
Quality property stocks
It's understandable that some ASX property shares have been hit hard as interest rates jumped higher.
Real estate investment trusts (REITs) are suffering from the double whammy of pressure on property valuations and debt being more expensive.
But, the higher rate of inflation is also boosting their rental income, which is supportive for valuations and distributions to investors.
However, the higher interest rates could cause pain to riskier and highly leveraged players in the property space. So, I'd be careful about which names to choose.
If I had to pick a few names, it would largely be due to their quality tenants and the length of the leases on the contracts. They would be: Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial REIT (ASX: CIP), Rural Funds Group (ASX: RFF) and Brickworks Limited (ASX: BKW). Brickworks has an impressive asset base, it doesn't rely on its building products earnings to fund the dividend.
Fund managers
With the big hit to various asset classes over the last twelve or so months, funds under management (FUM) have taken a significant hit.
However, I think that once the interest rates stop rising, investor confidence could start returning. That could lead to generally-rising asset prices and a return of good FUM inflows as well. That could make fund managers good ASX income stocks at this level.
Active fund managers do face the headwind of competition from low-cost exchange-traded funds (ETFs). But, the good performing ones could do well, particularly from the lower valuations we're seeing.
With pretty high dividend payout ratios, I think some fund managers could pay very good dividend income in the next few years, including Pinnacle Investment Management Group Ltd (ASX: PNI), GQG Partners Inc (ASX: GQG) and Pacific Current Group Ltd (ASX: PAC).
