I often find that looking at the companies that are being most searched for by investors can point me in the right direction.

For that reason, I looked at the top 10 most-searched-for investments. These are companies that UK-based investors looked at over the last 24 hours. From this list I found a company that could be suitable for my portfolio. This list outlines companies that have piqued the interest of investors, and could indicate that an investment opportunity is possible.

The company on the list that first drew my attention was Redrow (LSE: RDW), a residential housebuilder primarily operating throughout England and Wales. The company’s share price has struggled over the last few years, down 43.3% in 2022. Furthermore, the company also trades at a significant discount from pre-pandemic levels, down 52.9%.

Share price struggles

This fall in share price may have attracted some interest in the company and be behind the increase in searches for Redrow. The share price fall itself appears to have stemmed from a recent broker update. Deutsche Bank cut its price target for the company’s shares to 499p from 784p, although it reiterated its ‘buy’ rating.

I also think it’s important that this new price target is still a 25% increase from current levels. It is likely that this target level, combined with the downward trend in share price, it what has drawn interest from UK investors.

Strong underlying fundamentals

Despite these intriguing characteristics, it is important to look at the underlying fundamentals of the company. Interestingly, Redrow’s reported earnings per share have increased considerably from the 2020 financial year. In addition to this, the company’s turnover has now reached its highest level on record.

This increase in earnings, combined with significant falls in the share price, means the price-to-earnings (P/E) ratio has fallen to almost a third of 2020 levels. Redrow now has a P/E ratio of just 4.2, putting it below the housing sector average of six.

Future headwinds

Despite this, I should not to ignore the reasons why the share has fallen out of favour with the market. Given this company is a housebuilder, there are several sector-wide risks. These include reduced demand, and house price falls, both of which could cause the share price to decline further.

Nonetheless, I believe this approach of looking at the most popular company searches by UK investors has helped me identify a promising opportunity. Redrow’s fundamentals indicate good levels of cash generation, low debt, and even a high dividend yield of 8%. For this reason, I would add Redrow to my portfolio once I have the funds.

For that reason, I have decided to use the price-to-earnings (P/E) ratio of each company in the index, and compare this with their relative sector. My filter aims to highlight companies trading at the lowest 1% of P/E ratios within their respective sectors.

Redrow

The first company identified by my filter was Redrow (LSE: RDW), a residential housebuilder primarily operating throughout England and Wales. This company trades at a significant discount from pre-pandemic levels, down 52.9%.

Interestingly, the company’s reported earnings per share have increased considerably from the 2020 financial year. This increase in earnings, combined with significant falls in the share price, has resulted in the P/E ratio falling to almost a third of 2020 levels.

Redrow now has a P/E ratio of just 4.4. That’s below the sector average of six, and the lowest in the sector. The company also has several strong underlying fundamentals, with good cash generation, low debt, and a high dividend. This yield is now forecast to hit 8%.

Despite this, it’s important not to ignore the reasons why the share has fallen out of favour with the market. Given this company is a housebuilder, there are several sector-wide risks, such as reduced demand, and house price falls, both of which could cause the share price decline to continue.

Nonetheless, I believe my filter has highlighted a good opportunity, and therefore I would add Redrow to my portfolio.

Imperial Brands

The second company on my list is Imperial Brands (LSE: IMB), the fourth largest tobacco company in the world. It is currently trading with a P/E ratio of 7.7. This makes it the lowest in the sector, compared to the average of 9.

The company has performed fairly well over the last two years, rising 5.3% in 2021, and 16.8% so far in 2022. However, over a longer time horizon the company’s share price has declined significantly. It’s down almost 55% from its peak in 2016.

It’s fair to say that despite the clear discount opportunity, the underlying fundamentals are more of a mixed bag. Earnings have increased steadily over the last three years, and profit margins are strong. Furthermore, the company has a forecast yield of 7.5% and has consistently paid a dividend for 25 years.

On the other hand, debt levels are rising, and cash generation is well below the three-year average. Additionally, earnings are forecast to decline over the next year, with turnover expected to follow the same trend. This is less encouraging and leads me to question whether this truly is a value investment opportunity.

For that reason, despite being the cheapest in its sector, I would not be tempted to add Imperial Brands to my portfolio, since the negative underlying fundamentals outweigh the discounted share price, in my opinion.

Here I’m looking at three that I’m considering buying in September, depending on how their latest news turns out.

Bricks

One is Redrow (LSE: RDW), with full-year results due on 14 September. Housebuilder shares have slumped this year. I didn’t think they would, as demand has remained strong. But a fall has to be a buying opportunity for those of us who see long-term gains, surely.

Redrow’s forecast dividend yield stands at 6.5%. That’s fairly modest compared to some in the sector. But last year’s was covered three times by earnings, which I think takes some of the pressure off.

The company launched a share buyback programme in July, too. It intends to return up to £100m to shareholders that way. When there’s capital to spare like that, I feel even better about a company’s long-term dividend prospects.

A prolonged period of high inflation and interest rates could harm housebuilder share prices, though. And that has to be the biggest danger.

Food

Maybe it’s the contrarian in me. But I like the look of a number of real estate investment trusts (REITs) these days. And for me, Supermarket Income REIT (LSE: SUPR) ticks the boxes.

The share price has been erratic over the short term, but it’s showing longer-term strength.

The trust holds a portfolio of UK supermarket real estate assets. And that’s got to be one retail business that will still need the big bricks and mortar facilities no matter how our shopping habits might change.

Dividends have been yielding around 5% in recent years, and forecasts suggest similar to come. I like the supermarket sector, and I rate Tesco as a long-term buy.

But I can’t help seeing this REIT as a diversified play on the whole sector.

What are the downsides? I wonder if the share price might be a bit overheated, and if fears of property price falls might turn it downwards. Full-year results are due on 21 September.

Money

I have my eye on Investec (LSE: INVP), with a trading update due on 23 September. Investec is a FTSE 250 bank, focused on private and corporate banking and wealth management. As such, I hope it will be more resilient in the face of higher interest rates.

I think its share price shows that, remaining reasonably buoyant in 2022.

Investec operates primarily in the UK and South Africa. And I do think that brings risk into the equation, as South Africa’s political situation could be getting a little tense. And investors potentially withdrawing funds would not be good.

Earnings and dividends slumped during the pandemic. But the year ended March 2022 saw things back to pre-Covid levels, with a well-covered 5% dividend yield.

I’m not sure I’d buy Investec shares over a UK bank stock if I only held one. But I think it might make a nice addition to my existing Lloyds investment.

Redrow shares continue to fall

As a quick reminder, Redrow is one of the biggest housebuilders in the UK. Initially starting as a commercial developer, it changed to building homes in 1980. At present, the Welsh-based firm has over 14 operational divisions throughout the UK with numerous developments and employs over 2,000 people.

So what’s happening with Redrow shares currently? Well, as I write, they’re trading for 478p. At this time last year, the stock was trading for 681p, which is a 29% decline over a 12-month period. Many UK shares have fallen in recent times due to macroeconomic issues such as soaring inflation, rising costs, and the supply chain crisis.

Risks to note

I believe Redrow shares have fallen due to the issues noted above. Furthermore, they could experience further pressure as there is no end in sight for these factors. Rising costs could put pressure on profit margins, which often underpin returns in the form of dividends. Supply chain issues could affect operations and sales. Another negative is rising interest rates, which are being employed to combat rising inflation. This will make homes harder for consumers to purchase due to higher mortgage rates, and could affect short-term demand.

Finally, housebuilders are traditionally seen as good income stocks. I am conscious that dividends are never guaranteed. They can be cancelled at any time to conserve cash in the face of economic volatility, a bit like now. I will keep an eye on Redrow’s dividend.

The bull case and my verdict

So to the positives then. Firstly, I believe Redrow will benefit from the state of the current housing market in the UK. Demand for homes is outstripping supply by a fair margin. With this in mind, I believe Redrow should be able to leverage this demand into growing performance and ultimately, returns for its shareholders.

Next, at current levels, Redrow shares look great value for money on a price-to-earnings ratio of just 6. There is a consensus that a ratio of 15 and under represents a potential bargain on the surface of things.

As well as cheap shares, Redrow would boost my passive income stream too. The current dividend yield stands at just over 6%. This is three times the FTSE 250 average of 1.9%.

Overall I believe Redrow could be a good stock to boost my holdings for the long term. I am conscious of the current headwinds and expect the shares to experience some volatility. To summarise, a burgeoning market, rising demand, the passive income opportunity, and current cheap shares help me make my decision.

Let’s take a high-level tour of the complex world of valuation, uncovering some of the more promising value investment opportunities available.

What are undervalued stocks?

Undervalued stocks are businesses whose shares are trading below their underlying intrinsic value. With mood and momentum being the primary driving force behind stock prices in the short term, discrepancies between price and value occur constantly. And being able to identify such opportunities can be a highly lucrative endeavour.

These terms, “price” and “value” are often used synonymously in everyday life. But in the realm of finance, there is a stark difference between the two.

To quote famous investor Warren Buffett, “Price is what you pay. Value is what you get”. Buffett is probably one of the most successful value investors alive today. He made his multi-billion-dollar fortune by identifying strong businesses whose share prices were trading below the true worth of the underlying company and then investing in these undervalued stocks.

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Top undervalued shares in the UK 

Here are some of the top undervalued stocks on the London Stock Exchange.

Standard Chartered

Banking stocks typically outperform the market during times of higher inflation thanks to the subsequent boosts in interest rates, expanding lending margins. For many UK investors, Lloyds is often the go-to bank investment idea. However, Standard Chartered seems to be making bigger waves.

Management recently announced its ambitious goal of delivering an annual return on tangible equity (RoTE) of 10%. Given Standard Chartered’s track record of over-promising and under-delivering, it’s not surprising that many remain sceptical, resulting in a seemingly low valuation.

Yet looking at its 2022 first-quarter results, management so far seems to be on target. Its cost-to-income ratio has fallen to 62.1% from 74.3%, while RoTE reached 11.1%. Whether these figures can be maintained moving forward has yet to be seen. But so far, the group’s new strategy seems to be paying off.

Imperial Brands

Imperial Brands is one of the UK’s largest tobacco companies, generating most of its revenue from selling cigarettes. However, in recent years management has begun switching up its strategy by bringing healthier products onto the market, such as heated tobacco, oral nicotine, and vaping devices.

The stock currently trades at a cheap price-to-earnings ratio of 8.6. But this is nothing new. Like most tobacco companies, the business has always looked undervalued. Why? Because some investors aren’t fond of investing in a company whose products are known to cause severe long-term harm. But consequently, the group yields a pretty massive dividend that continues to return significant capital to shareholders each year.

Centrica

Centrica is a leading energy and utilities service provider in the UK. Beyond supplying gas and electricity, the group offers a collection of plumbing, drainage, and heating services through its numerous subsidiaries, including British Gas, Dyno, and PH Jones.

With electricity prices rising, the group’s bottom line has started moving in the right direction. And with a long track record of underachieving, it seems investors haven’t been entirely eager to jump on board. Consequently, shares currently trade at a relatively low valuation despite double-digit growth.

It’s possible that the recent jump in profitability is only short term. However, for the time being the stock is trading well below analyst forecasts. 

easyJet

Travel stocks have understandably been pulverised by Covid-19. With travel restrictions emerging worldwide, companies like easyJet have been limping on since 2020. Today the situation has drastically improved, though there remains a long road ahead before a full recovery.

Like many other airline stocks, there remains quite a lot of uncertainty surrounding easyJet. Yet despite this, the group seems to be in a stronger position than most. Its net debt has been steadily falling as it accumulates cash and equivalents on its balance sheet. Meanwhile, passenger capacity in the third quarter of 2022 is expected to reach 90% of pre-pandemic levels, with a near-complete recovery by the end of the year. 

The group obviously still has to contend with an increased debt load in a higher interest rate environment. But with fuel costs largely hedged to absorb the impact of rising oil prices, the group looks capable of making a full recovery in the long term. And that could mean its currently depressed stock price is undervalued versus the group’s future potential.

Redrow

After the pandemic decimated supply chains, homebuilders struggled to source necessary materials to keep up with surging demand. Redrow was no exception, with the stock taking a pretty significant hit as a consequence. 

Today, shares are still trading below pre-pandemic levels. Yet that’s despite the latest interim results showing superior revenues, profits, and a record order book. With interest rates rising, affordability for new homes is starting to suffer, which undoubtedly affects the group’s ability to sell its properties.

But in the long run, demand for housing isn’t going anywhere. And with the share price currently trading around six times earnings, this stock looks undervalued.

How to find undervalued stocks

There are two common methods to determine value:

1.     Relative Valuation (Multiples)

Starting with the easiest of the two, the relative valuation method doesn’t actually try to pinpoint the value of a company. Instead, it compares it with other businesses operating in the same or similar industry to see at what price point the shares are trading relative to another stock.

This is where financial metrics such as the price-to-earnings and price-to-sales ratio steps in. Stocks trading at a P/E or P/S ratio below the industry average are considered undervalued. Similarly, those trading above the average are considered overvalued.

2.     Intrinsic Valuation (Discounted Cash Flow Models)

The problem with the relative valuation method is that it makes many broad assumptions. Every business is unique in some way, which can skew results when compared with other companies, even if they operate in the same space. It’s entirely possible for a stock to trade above its industry average and still be undervalued.

This is where intrinsic valuation comes in. Unlike the relative, this method attempts to estimate the underlying value of a company based on the present value of its future cash flows using something called a Discounted Cash Flow model (DCF).

DCFs are a bit of a rabbit hole. But in oversimplified terms, an analyst forecasts the revenue stream for the next 5-10 years along with profitability to calculate the group’s future cash flows. These cash flows are then discounted back to present-day value at a rate reflecting the risk level associated with the stock. 

Calculating a sensible discount rate in and of itself can be a challenge. A typical go-to figure is 10%, but this can often be too little or too much, depending on the company. 

Once cash flows have been translated into present-day value, it’s then converted into equity value, which is the equivalent of market capitalisation. This can then be compared to the current share price to determine whether a stock is undervalued or not.

Needless to say, intrinsic valuation is far more time-consuming and challenging than relative valuation. However, it’s also more reliable, providing the analyst can produce accurate and reasonable forecasts – something that can be challenging to achieve.

Finding undervalued stocks in international markets

The core principles in identifying undervalued stocks and shares in international markets remain pretty much the same. However, there are some key differences to be aware of.

Depending on the location, the difficulty of accessing additional capital, either through debt or equity, can vary wildly.

If taking a relative valuation approach, performing a multiples comparison against other related companies operating in the same country is important.

If taking an intrinsic valuation approach, the discount rate needs to be adjusted to reflect both the difficulty of accessing capital and the risks of operating in certain countries. 

For example, accessing capital as a business in the US is far easier than in Brazil. But there is also the factor of the operating environment to consider. An American oil company might have easy access to funds, but if drilling is actually done in a more politically unstable region, the risk and impact of potential disruption need to be reflected in the discount rate.

Are undervalued stocks right for you?

Charlie Munger once said all investors are value investors. And in many respects, he’s absolutely right. After all, we’re all trying to pay a low price today to eventually sell at a higher price in the future. However, being a value investor requires a lot of knowledge and, more importantly, patience.

Undervalued stocks and shares can continue trading below their true value for months or even years. And it’s easy to lose faith in your original valuation model. After all, there is always the possibility that you were wrong. That’s why this strategy is not suitable for everyone. But for those who dare to go against the crowd and arm themselves with detailed analysis updated as new information comes to light, achieving long-term, market-beating investment returns becomes far more achievable.

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[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

SSE

What it does: SSE produces energy and runs a transmission and distribution business in Scotland and England. 

By Royston Wild. Selecting robust dividend stocks in the current climate requires extra care. Soaring inflation is threatening to derail the global economy and by extension profitability for UK plc. This could have significant ramifications on shareholder payouts in the near term and beyond. 

This is why I think buying SSE (LSE: SSE) shares could be a good idea for investors. I believe the biggest threat facing this FTSE 100 stock in the near term is a painful hit from any windfall tax. 

It’s my opinion that SSE is as close to a stress-free stock one can get in these uncertain times. The business generates electricity, one of life’s essential phenomena. It also operates a power distribution and transmission division that connects 3.8m homes and businesses. 

I wouldn’t just buy the utilities business for its robustness, though. I think earnings here could soar over the next couple of decades as it increases investment in renewable energy sources. It hopes to increase renewables output fivefold in the decade to 2031. 

SSE’s forward dividend yield sits at a healthy 5.5%. 

Royston Wild does not own shares in SSE. 

Rio Tinto

What it does: Rio Tinto owns and operates a number of mines around the world. Its largest product is iron ore.

By Stephen Wright. I’m looking carefully at Rio Tinto (LSE:RIO) shares in July. The stock is a Dividend Aristocrat, meaning that it has increased its base dividend consistently over the last 25 years. 

I think that the stock is facing some headwinds that might give investors a decent opportunity to buy shares at a reasonable price in July. 

High commodity prices have been helpful to Rio Tinto’s business recently and the company has done a good job of taking advantage of this. But I think that this might abate slightly in July.

With interest rates rising and inflation still at high levels, I think that demand for finished goods is going to decline. I anticipate this weighing demand for Rio Tinto’s raw materials and bringing the stock down.

If this happens, I’m looking at buying shares for my portfolio.

Stephen Wright does not own shares in Rio Tinto.

Redrow

What it does: Redrow is a FTSE 250 housebuilder with a focus on building good quality mid-priced homes designed for existing homeowners.

By Roland Head. I find that founder-led businesses are often safer investments in troubled times, thanks to prudent financial management. Redrow (LSE: RDW) founder Steve Morgan has retired and only owns 15% of the business, but I think his influence remains.

Like all housebuilders, Redrow’s share price has fallen in recent months. But the stock is starting to look cheap to me, with a 6% dividend yield that’s covered three times by forecast earnings.

Of course, there’s still a risk we’ll see a much deeper slowdown than the market is expecting. However, Redrow started the year with £240m of net cash and a £1.5bn order book. That’s equivalent to nine months’ sales.

My sums suggest Redrow’s 6% dividend yield will be safe, even if we do suffer a recession. For this reason, I think this could be a top dividend stock to buy in July. I’m considering Redrow for my own portfolio.

Roland Head does not own shares in Redrow.

Primary Health Properties  

What it does: Primary Health Properties is a real estate company that owns healthcare properties across the UK and Ireland.

By Edward Sheldon, CFA. There are a few reasons I’ve selected Primary Health Properties (LSE:PHP) as my top dividend stock for July.

The main reason is that the company has defensive attributes. Not only does it operate in a defensive industry (people aren’t going to stop going to the doctor because there’s a recession), but a large chunk of its revenues are backed by the UK government. So, it’s a sleep-well-at-night stock, to my mind.

Another reason is that it owns ‘real assets’ – physical assets that have real value to society. In the past, these kinds of assets have protected investors against inflation.

Additionally, there’s a nice dividend here. At present, the prospective yield on offer is around 4.7%.

This dividend stock does have a slightly higher valuation. Currently, the forward-looking P/E ratio is around 20, which adds some risk.

However, I’m comfortable with the valuation here given the company’s defensive attributes and attractive yield.

Edward Sheldon has no position in Primary Health Properties. 

Warehouse REIT

What it does: Warehouse REIT owns a diverse collection of well-positioned warehouses across the UK, primarily serving e-commerce enterprises.

By  Zaven Boyrazian. With the pandemic accelerating the adoption of e-commerce, a growing problem has emerged. More products are being bought and sold online, requiring greater warehousing space that seems to be running out.

Warehouse REIT (LSE:WHR) is one of several players trying to solve this challenge. And so far, it’s significantly enjoying the tailwinds of surging demand. With the value of its storage facilities climbing and management successfully raising rental prices, free cash flow has exploded over the years, resulting in an attractive dividend yield of 4.2% today.

A lot of its property acquisitions have been funded through debt. And now that interest rates are rising, margins are expected to be squeezed. In fact, that’s why its shares have tumbled by 12% since the start of 2022. But with underlying operating margins standing at around 70%, I don’t see this as a major threat, making the recent drop a buying opportunity for investors, in my eyes.

Zaven Boyrazian does not own shares in Warehouse REIT.

HSBC

What it does: HSBC is a global banking and financial services firm, with segments ranging from mortgages to investment banking.

By Andrew Woods. HSBC (LSE:HSBA) showed resilience following a fall in profit during the pandemic. Between 2020 and 2021, pre-tax profit more than doubled from $8.7bn to $18.9bn, in line with a bounce back in consumer demand and a more favourable economic environment. The 2021 dividend payment of $0.25 per share equated to a dividend yield of 4.5%. HSBC has been consistent with its yields over the past five years. 

The company may now also benefit from rising interest rates. In the UK and US, these rates are now at 1.25% and between 1.5% and 1.75%, respectively. More rises may come in July. Interest rates are important for a business like HSBC, because they can dictate how much it can charge for its lending services. These products may include loans and mortgages. The cost-of-living crisis, however, may deter some potential customers from taking on more debt, which could be bad news for HSBC.

Andrew Woods does not own shares in HSBC.

Phoenix Group Holdings 

What it does: Phoenix Group Holdings is the largest long-term savings and retirement business in the UK. It offers a range of life and pension products across several brands.  

By Harshil Patel.  Currently yielding 8%, Phoenix Group Holdings (LSE:PHNX) is my top dividend stock pick for July. With the average FTSE 100 share yielding 4%, Phoenix Group is a breath of fresh air when searching for dividend income.  

With consumer price inflation rising to over 9%, it comes close enough to battling rising prices.  

2021 was an outstanding year for Phoenix. It delivered record cash generation that allowed for a 3% lift in dividend. With resilient cashflow and a strong balance sheet, I reckon the future looks bright. 

It has demonstrated an excellent track record with strong dividend growth over the past decade. Much of that growth came from new acquisitions, but what’s exciting is that this year’s dividend growth arrived organically.  

Phoenix is proving to be a growing and sustainable business. Another characteristic I like is its resilience in volatile markets like the one we have currently. It seems its hedging approach might make it more resilient versus many of its peers.  

Harshil Patel does not own shares in Phoenix Group Holdings.

Unilever

What it does: Unilever is a fast-moving consumer goods company dealing with branded products in beauty, personal care, foods, refreshment and home care.

By Kevin Godbold. I’m delighted Unilever (LSE: ULVR) appears on my high dividend yield stock screens. The company’s attractions led to the valuation being too high for my taste for years — until now.

Worries about recession, the war in Ukraine and the cost of living crisis have all conspired to drive the stock price down this year. However, in April, chief executive Alan Jope delivered a reassuring update on recent trading. “We are executing well in a very challenging input cost environment,” he said. And he reckons underlying sales growth of 7.3% had been driven by strong pricing.

And that’s excellent news because it means Unilever’s strong brands are maintaining pricing power. That suggests an ability to protect margins in inflationary economic environments.

Meanwhile, Unilever’s financial and trading record is a thing of beauty. And I have confidence the business can maintain its rising dividend stream in the years ahead.

Kevin Godbold does not own shares in Unilever (yet, but likely will do soon!)

British American Tobacco 

What it does: Operating in 175 markets worldwide, British American Tobacco manufactures and sells cigarettes as well as other nicotine products.

By Charlie Carman. Unclouded by falling tobacco consumption in developed markets, British American Tobacco (LSE: BATS) is a top FTSE 100 performer in 2022. The share price has increased 30% this year to date.  

It’s a true Dividend Aristocrat. British American Tobacco shares offer a 6% dividend yield and shareholder distributions have risen consistently since 1999. In addition, the company announced a £2bn share buyback programme earlier this year.

There are regulatory threats facing this tobacco giant in many key markets. For example, the US Food and Drug Administration recently announced plans to set maximum nicotine levels in cigarettes and other tobacco products.

However, the company aims to counteract such challenges via its reduced-risk vapour products and tobacco-free nicotine pouches. It’s targeting 50m consumers of non-combustible products by 2030.

The tobacco industry’s demise has long been predicted but failed to materialise. I believe British American Tobacco shares can boost my portfolio’s returns for years to come.

Charlie Carman owns shares in British American Tobacco. 

Somero Enterprises

What it does: Somero is a manufacturer of laser-guided equipment used to place and screed concrete slab in buildings.

By Paul Summers: I’m biased when it comes to Somero Enterprises (LSE: SOM). I’ve held this high-quality, US-focused company within my S&S ISA for a few years now. Quite a bit of this has to do with the dividend stream it offers.

As I type, Somero is forecast to yield almost 10% in the current financial year. That’s going to take an awful lot of the sting out of galloping inflation. This cash return is also likely to be reasonably covered by profit, meaning it should actually get paid.

One risk I need to continue bearing in mind here is that Somero is undoubtedly a cyclical business. As such, the share price could head lower in the near future if a recession becomes a reality.

However, the stock already trades at less than eight times earnings. So, I suspect/hope a lot of bad news is already priced in.

Paul Summers owns shares in Somero Enterprises.

Grafton

What it does: Grafton is a merchant that sells all sorts of building materials. These include timber, decor, DIY items, and more.

By John Choong. Grafton (LSE: GFTU) is one of the few potential beneficiaries of the government’s new Help to Build scheme. Unlike Help to Buy, the new initiative won’t directly benefit the traditional property developers. This is because the new initiative is only available for houses built by self or custom-builders. Due to Grafton’s excellent relationship with independent builders, it could stand to benefit from the tailwind of the new scheme.

While the group has a manufacturing segment, the bulk of its revenue comes from its distribution businesses. This is where I expect most of the growth to come from. So, if the group’s top line receives a boost from new builds, I expect both its share price and dividend pay out to increase substantially, hence making its current share price cheap. After all, it’s currently trading at a P/E ratio of 9.14. Not to mention, Grafton has healthy profit margins too, which makes it an attractive stock for investors to purchase.

John Choong has no position in Grafton

Valuations

The share prices of housebuilders have been on a downward track this year amid rising inflation, higher interest rates, and a cost of living crisis. The cost of fixing the cladding crisis has also weighed on share prices. However, this comes on the back of a very strong year for housebuilders. This means we’re seeing some fairly low price-to-earnings (P/E) ratios based on the past year’s earnings.

While these figures are based on the previous year’s earnings and the current share price, it should be fairly indicative as demand for new homes has remained strong so far this year. Many companies have also noted a strong forward order book.

Dividends

As discussed, I think housebuilder stocks are a good place to look for strong dividend yields. Here’s how these six companies stack up at today’s prices.

While Persimmon might appear like the clear winner here, it’s important to note that sizeable dividends are not always sustainable. The dividend coverage ratio is a good place to look to see whether a stock can afford to pay its dividend.

The ratio indicates how many times the company can pay its stated dividend from its net income. The data above suggests that Persimmon’s dividend is least sustainable, while Redrow’s dividend is most sustainable. It’s worth noting that the reporting periods for the dividend coverage ratios are do not match perfectly but provide a good idea of the comparative sustainability.

Cladding costs

The government has made housebuilders sign up to a fire safety pledge that sees them put money aside to reclad houses and flats built using dangerous materials. The costs are pretty substantial. The below figures are the most recent provided by housebuilders, combining money already put aside and estimates for future work.

Which one is best for my portfolio?

It’s certainly worth noting that there could be downward pressure on the housing market this year and next. And this could further impact share price. However, I feel housing stocks are already quite depressed and I’m bullish on long-term demand for property in the UK.

My top pick is Vistry Group. It beat its pre-pandemic performance but some distance last year and said it was in a strong position for further growth in 2022. Its sizeable dividend is also well covered. I’ve bought Vistry Group shares and would buy more.

Royston Wild: BAE Systems 

The BAE Systems (LSE: BA) share price lifted off in February as tragic events in Ukraine unfolded, and it’s stayed strong since then. The war in Eastern Europe illustrates the tense geopolitical backdrop that I think will support sustained and strong demand for BAE Systems’ defence products. 

In fact, BAE Systems has grown earnings in four of the past five years as global arms spending has risen. The only reversal came in 2020 when Covid-19 disruptions hit the bottom line. City analysts expect profits to keep heading northwards this year, and next too, as the West bumps up arms spending in light of recent events.

I think BAE Systems could be a particularly strong performer in May too as rising fears over rampant inflation boost demand for safe-haven shares like defence companies. 

Royston Wild does not own shares in BAE Systems.

Zaven Boyrazian: Alpha FX Group

Alpha FX (LSE:AFX) is a financial services group specialising in currency risk management and alternative banking solutions. The firm helps businesses mitigate foreign exchange risk while simultaneously enabling almost instant enterprise-scale international transactions – something not possible with archaic methods like wire transfers.

Corporate banks offer similar solutions and are a significant source of competition. However, these are often prohibitively expensive. By charging on a per-transaction basis, Alpha FX enables its clients to overcome this barrier to entry.

With an impressive track record of double-digit growth and its 2022 performance continuing to impress, I think it’s time to add more shares to my portfolio today.

Zaven Boyrazian owns shares in Alpha FX

Edward Sheldon: Smith & Nephew

My top British stock for May is Smith & Nephew (LSE: SN). It’s a healthcare company that specialises in joint replacement systems.

There are a couple of reasons I like the look of Smith & Nephew right now. One is that there’s a huge joint replacement backlog globally at the moment due to Covid-19. So, the company appears to be well positioned for growth in the years ahead.

Another is that the healthcare sector tends to be quite defensive in nature. So, the stock could hold up relatively well if we see a recession.

It’s worth pointing out that Smith & Nephew shares are not cheap. So, this adds a bit of risk. All things considered though, I see a lot of potential here.

Edward Sheldon owns shares in Smith & Nephew.

Stephen Wright: London Stock Exchange Group

I think that my top stock for May is one of the best companies in the UK. It combines a core business that has virtually no competition with other operations that have high margins, low costs, and generate huge returns.

The stock is London Stock Exchange Group (LSE:LSEG). The company operates the exchanges on which financial market transactions take place. These have high barriers to entry. But the company also has various other operations, including data, fixed income trading, and clearing services.

Stephen Wright does not own London Stock Exchange Group.

Michelle Freeman: Wizz Air

It’s no surprise to anyone that airline shares have had a rough time over the last two years. But with Wizz Air (LSE: WIZZ) down over 30% since the start of the year, I think its shares look potentially oversold compared to others. 

Yes, Wizz has more exposure to those Eastern European travel destinations that are impacted from the on-going war. But it has been diversifying its network and increasing capacity recently, including picking up more Gatwick slots from Norwegian.  

With the WTTC reporting triple-digit growth compared to last year, I wouldn’t be at all surprised to see the share price benefit accordingly. 

Michelle Freeman does not own shares in Wizz Air.

Andrew Mackie: Anglo American

My top stock for May is Anglo American (LSE: AAL). This may seem like a strange choice, given the 20% share price fall in the three days following a disappointing Q1 production report.

However, I would look beyond the headlines. At the moment, a lot of miners are suffering with high input costs, particularly diesel, Covid-related absences and production issues. However, all this is likely to do is push up prices even further.

The business remains a cash-generating machine, with a dividend policy of returning 40% of underlying earnings to shareholders.

For me, the commodities cycle is still very much in its early innings. With such a diversified portfolio, the sell-off has presented a good entry point for long-term investors.

Andrew Mackie does not own shares in Anglo American.

Andrew Woods: Tullow Oil

Tullow Oil (LSE: TLW) is an oil and gas exploration and production firm. It operates globally, but it has larger operations in Ghana and Kenya in Africa, and Guyana in South America.

The pandemic hit the business hard, resulting in a $1.2bn pre-tax loss in 2020. It recovered, however, to post a $200m pre-tax profit the following year.

In March, it increased its stake in two oil fields in Ghana, potentially increasing production by 4,000 barrels of oil per day. With oil prices at high levels, I think this firm could be a top stock for me in May.  

Andrew Woods has no position in Tullow Oil.

Paul Summers: XP Power

Having once made a big profit on the stock, I’m starting to think about buying XP Power (LSE: XPP) again. The share price of the critical power solutions provider has tumbled in the last few months due to a resurgence of Covid-19 in Asia, higher costs, and limited component supply.

Despite these headwinds, business is ticking along nicely. XP had a record order book of roughly £260m moving into Q2.

The valuation of 17 times forecast earnings looks pretty reasonable to me. There’s also a well-covered dividend to keep investors happy while the dark clouds pass. 

Paul Summers has no position in XP Power

John Choong: Dunelm

Dunelm (LSE: DNLM) was predicted to falter after Covid restrictions were lifted. But its most recent earnings report showed a 25% increase in its profits, with total sales up 10.6% year over year. Additionally, Dunelm has managed to maintain healthy margins of 10.8% whilst boasting a stellar balance sheet with zero debt.

Although its stock has taken a plummet due to disappointing retail sales figures, the fine print proves that the British retailer remains immune for the time-being, as household goods stores saw a 2.6% increase in sales. This is backed up by Dunelm’s own numbers, with an 8.5% increase in active customer growth.

John Choong has no position in Dunelm.

Roland Head: Redrow

I am picking FTSE 250 housebuilder Redrow (LSE: RDW) as my top stock for May. I think that shares in this founder-backed group could offer impressive value.

The risk of a UK economic slowdown is the main concern here. That could hit sales. But recent trading updates have not suggested any slowdown in demand for new housing.

In Redrow’s latest results, the company increased its sales and profit guidance for 2022 and said that profit margins were rising despite higher costs.

With the stock trading on six times earnings and offering a 6% dividend yield, I think Redrow offers excellent value.

Roland Head does not own shares in Redrow.

G A Chester: Integrafin Holdings 

Integrafin Holdings (LSE: IHP) owns Transact, one of the largest independent platforms serving UK financial advisors and their clients. It may not be as well-known as direct-to-consumer operator Hargreaves Lansdown, but it has a strong record of growth. 

Revenue has increased at a compound annual rate of 12% over the last four years and earnings have advanced at a rate of 14%. Negative market movements in asset prices are a risk, and wage inflation is also currently a friction. 

Nevertheless, after recent share-price weakness, and with a tailwind of structural growth in the UK wealth-management market, Integrafin looks a quality business on sale cheap. 

G A Chester has no position in Integrafin Holdings. 

Alan Oscroft: Kingfisher

At around the 250p mark, DIY specialist Kingfisher (LSE: KGF) looks cheap to me. The owner of B&Q and Screwfix staged a strong pandemic comeback. But that’s reversed in 2022, for a 30% fall over the past 12 months. The shares are now on a trailing P/E of only around seven, with dividend yields above 3.5%.

My main concern is that free cash flow for 2021-22 fell sharply. With net debt of £1.6bn, that could bite. But the company is buying up its own shares right now. I’d do the same.

Alan Oscroft has no position in Kingfisher.

Royston Wild: Redrow

A steady flow of positive data continues to stream in from Britain’s housing sector. Last week, for example, news emerged that average home prices in the UK rose at their fastest pace for 17 years in March.

The ultra-low valuations of London’s quoted housebuilders seem at odds with the industry’s resilience, however. The past provides no guarantee that homes demand will remain strong as interest rates rise. Yet I think this risk is more than baked into the share prices of most housebuilding shares.

I believe that FTSE 250-quoted Redrow (LSE:RDW) is one of these brilliant bargain dividend stocks. Today the business — which in February upgraded its medium-term profit guidance — trades on a forward P/E ratio of just 5.6 times. It also carries a large 6% yield at recent prices.

Royston Wild does not own shares in Redrow.

Stephen Wright: BP 8% Cumulative 1st Preference

I’m taking a slightly different theme with my top British dividend stock for April. The BP 8% Cumulative 1st Preference (LSE:BP.A) shares are catching my eye. Preferred shares work slightly differently to common stocks, but Warren Buffett is a big fan. And I think that this one might be a winner.

The shares pay a fixed dividend of 8p/share. Importantly, the company has to pay dividends to its preferred shareholders in full before it can pay dividends to its common stock holders. For an income-seeking investor, I think that the added protection of preferred dividends might be welcome.

Stephen Wright does not own shares in BP Cumulative 1st Preference 8%.

Roland Head: Synthomer

FTSE 250 chemicals group Synthomer (LSE: SYNT) has caught my eye recently. I believe it could be an attractive dividend investment at current levels.

Synthomer benefited from a boom in demand for latex gloves during the pandemic, but it’s now returning to a more sustainable and diverse mix of product sales.

Although I can see some risk relating to management changes and the integration of a recent acquisition, I believe the fundamentals look strong.

Synthomer offers a forecast dividend yield of 5.5% for 2022. I believe it should deliver steady growth over the medium term.

Roland Head does not own shares in Synthomer.

Paul Summers: Taylor Wimpey

My top dividend stock for April is Taylor Wimpey (LSE: TW). Right now, the housebuilder is down to return 7.5% in cash in FY22. That makes it one of the highest-yielding stocks in the FTSE 100.

Sure, the potential for a wobble in the currently booming UK housing market can’t be ignored. With a valuation of just seven times forecast earnings, however, I’d say the market has already priced this in. The income stream is also likely to be covered nearly twice by expected profit. Staying diversified is vital but I’d be happy to buy today.

Paul Summers has no position in Taylor Wimpey.

Andrew Mackie: BP

My standout dividend stock for April is BP (LSE: BP). Although its yield of 4.3% is certainly not the most generous, this figure masks the true extent of the returns earmarked for shareholders.

Buybacks of $4.15bn have already been announced from surplus cash flow in 2021. In addition, the company has committed to return 60% of annual cash flow through buybacks. It estimates that if oil averages $80, that will equate to $7bn. Although the forced sale of Rosneft will likely impact that figure.

It also has the capacity to grow the dividend by 4% a year, at an average oil price of $60. Today, oil is over $100 and I expect it to remain elevated for some time to come.

Andrew Mackie owns shares in BP.

Harshil Patel: Imperial Brands 

My top dividend stock for April is Imperial Brands (LSE:IMB). This well-established consumer brand offers a juicy dividend yield of over 8%. That beats the average FTSE 100 yield of 3.5%.  

It also has an impressive track record when it comes to dividends, having consistently paid income to shareholders for over 25 years.   

Imperial is in the early stages of a multi-year transformation plan. There are always risks involved when it comes to business transformations. That said, it can afford some room for error as this dividend stock trades on a price-to-earnings ratio of just 6x. That looks super cheap to me.  

Harshil Patel does not own shares in Imperial Tobacco.  

Alan Oscroft: Direct Line Insurance Group

Direct Line Insurance Group (LSE:DLG) is my April pick amongst income shares. The insurance sector might be risky as we face soaring inflation and a possible recession. But I find Direct Line’s forecast 8.2% yield tempting.

My concern is that the dividend is likely to be only just covered by earnings. But there does seem to be cash around to pay it. In March, the insurer announced a share buyback worth up to £100m, in order to reduce its share capital.

That has an additional benefit in that it should help boost earnings per share and support future dividends.

Alan Oscroft has no position in Direct Line Insurance Group.

Although we’ve seen a mini rebound, I reckon the recent market shake-out has left behind some potential bargain buys. Here are five UK stocks I’m looking at for my personal share portfolio.

Buy on bad news

FTSE 100 bank Barclays (LSE: BARC) recently took a fall after it revealed an embarrassing £450m mistake. It’s unfortunate for new CEO Venkat, but the expected cost should be easily affordable.

For this reason, I don’t see this mishap as a reason to avoid Barclays. With the bank’s share price down by 20% so far this year, it’s is now trading at a discount of nearly 50% to its book value of 294p per share. The stock also boasts a forecast dividend yield of around 4.9%, which should be covered three times by earnings.

One niggling concern for me is that Barclays could have other skeletons still hidden in its cupboards. These might be more troublesome.

However, the bank’s performance has improved in recent years. I’d hope that the risk management background of the group’s new CEO might help eliminate future blunders.

For me, the bottom line is that Barclays financial position looks strong and its shares looks cheap, trading on just six times earnings. I’d buy this stock for my portfolio today.

Solid foundations

Housebuilder Redrow (LSE: RDW) has been hit by this year’s selloff. Redrow’s share price has dropped 25% since the start of the year and the company’s shares are now trading slightly below their book value of 555p.

Although housebuilders could suffer if interest rates rise or the UK sees a recession, there’s no sign of this so far.

In its latest results, Redrow said its order book rose by £200m to £1.5bn during the six months to 2 January. Pre-tax profit for the period rose by 17% to £203m, compared to the same period a year earlier.

One reason I like Redrow more than some of the big housebuilders is the company’s culture of owner management. Founder Steve Morgan still owns 16% of the shares, even though he stepped down from running the business a few years ago.

In my experience, companies that have had owner management often take more care to protect shareholders from big losses and pay reliable dividends.

Redrow’s forecast dividend yield of 5.9% should be covered three times by earnings. I reckon that should be affordable, even if profits dip. With the stock trading on just six times forecast earnings, Redrow is a cheap UK share I’d buy.

A bargain 7% yield?

Shares in post and parcel operator Royal Mail (LSE: RMG) have fallen by more than 30% so far this year. This looks harsh to me. Although Royal Mail is facing pressures from rising fuel and wage costs, the group’s performance over the last year has been very strong, in my view.

One reason for caution might be the end of free Covid-19 testing. Based on comments from the company, I estimate that test kits may have accounted for more than 5% of parcel volumes over the nine months to the end of December. That revenue could soon disappear.

Even so, chairman Keith Williams say that parcel volumes are now around a third higher than before the pandemic.

Looking ahead, City analysts only expect to see profits dip by around 5% over the coming year, before returning to growth. Consensus forecasts suggest a dividend of 23.7p per share this year, giving a yield of nearly 7%.

That seems cheap to me. I’d buy Royal Mail shares now for long-term growth.

Insiders are buying this UK share

One buying signal I like to look for is director buying. These insiders should have a good understanding of the business and of trading conditions.

So far this year, directors at latex glove specialist Synthomer (LSE: SYNT) have spent nearly £700,000 buying the company’s shares. I think this is a good sign they expect a return to normal after the disruption of the pandemic.

Synthomer is in a slightly odd situation, as demand for its core product surged during the pandemic. Demand is now easing, but the company has recently expanded its business through a big acquisition. This is expected to add to earnings over time. Synthomer has also just appointed a new chief executive.

There are a few moving parts here which make it hard to predict the exact outcome this year. However, City brokers expect Synthomer’s 2022 earnings to settle around 40% above the level reported in 2020. If that’s correct, then the shares could be trading on just seven times forecast earnings, with a dividend yield of 5.6%.

I’ve been following this UK share as its share price has fallen. At current levels, I think Synthomer could be a good, cheap share to add to my portfolio.

A stock I already own

When I’m searching for stocks to buy, sometimes I end up looking at shares I already own. One example of this is FTSE 250 financial trading firm IG Group (LSE: IGG).

The worst trading conditions for IG Group are when financial markets go really quiet. When that happens, the group’s big customers trade less, cutting the group’s income.

Fortunately for IG, we haven’t really seen quiet market conditions since before the pandemic. Given recent events, I don’t expect to see them in 2022 either.

For IG, this has meant two years of high trading volumes and record profits. At the same time, chief executive June Felix has been investing in growth and targeting new opportunities.

I’m optimistic about this business, which reported an operating margin of more than 50% last year. Although I expect to see a slowdown at some point, I think this risk is probably already reflected in IG’s share price. The stock looks cheap to me on nine times forecast earnings.

I’m happy to continue holding IG and collecting the 5.4% dividend yield. If I didn’t already own this UK share, I’d certainly be buying today.