The FTSE 250 is better known for its growth prospects, rather than as a target for income investors. Its stocks are thought to be riskier, and traditionally it has outperformed the FTSE 100.
Consequently, many investors may only buy mid-cap stocks when they’re bullish about equities. In times of uncertainty, cash often switches to bigger FTSE 100 companies. However, the impact of the coronavirus has seen the FTSE 100 drop to its lowest level since 2012.
Many large blue-chip firms have high percentages of international earnings. Some analysts believe that this may make them more vulnerable to a pandemic because trading globally becomes more difficult.
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For me, an investor with a penchant for passive income, this raises questions about how many UK large caps will struggle to fund their dividends this coming year. So, I think it’s a good time to consider the FTSE 250 for dividend stocks.
The mid-cap index contains some cash-rich companies with yields of at least 2% and a pattern of growing dividend pay-out ratios. I’ve singled out what I think are two such companies below.
A 7% yield hiding in the FTSE 250…
Payment services firm Paypoint (LSE: PAY) provides customers with specialist consumer payment products, and operates a UK-wide network of nearly 28,000 terminals in convenience stores. These provide payment services and support the Collect+ parcel drop-off network.
Paypoint has struggled with growth recently as people move from card to cash payments. This is likely reflected in its relatively low price-to-earnings ratio of 10.48. However, the firm has improved its operational efficiency and is diversifying to position itself for the future.
Even better, with an operating margin of over 40%, the firm is extremely profitable, and management are not shy to return cash to shareholders. An attractive dividend yield of 6.91% is on offer, and the dividend cover ratio at 1.38 shows it to be sustainable.
Of note, FTSE 250 constituent Paypoint has increased its dividend eight times over the last 10 years. It is also a cash-generative business, providing much needed liquidity to weather a bear market.
Analysts are divided, but I’m bullish
Spectris (LSE: SXS) produces instruments and controls to improve industrial productivity. It prides itself of operating in niche markets with high barriers to entry, and possesses strong intellectual property. This is a great position for a business in my view.
That said, recent market conditions have been challenging for the company and, admittedly, analysts have mixed views on its short-term prospects.
2018/2019 revenues were flat, but the company has now restructured and divested a less profitable division. It has also used management-directed self-help to produce target-beating recurring cost benefits of £25.5m. More value added is expected for 2020.
The present culture at FTSE 250 member Spectris appears to be one of driving efficiency and pursuing high-margin growth. This will be essential to survive the bear market.
The company offers a dividend yield of 2.3% and has an excellent history of growing its dividend. Moving forward, the strong balance sheet enables sustainable dividend cover for investors.
Currently a difficult climate for all businesses, I believe FTSE 250 constituents Paypoint and Spectris are well positioned to engage with the bear market. I’m also impressed by their dividend offerings to grow my passive income.
