2 smart FTSE 250 dividend stocks that I’d buy with £2,000 today

Royston Wild examines two FTSE 250 (INDEXFTSE: MCX) shares with excellent prospects for dividend hunters.

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Those seeking brilliant dividend shares on a budget can do a lot worse than to check out the housebuilders today.

In a recent article, I examined the income prospects of the builders currently populating the FTSE 100 and concluded that, with demand for new homes set to continue outstripping supply, that the likes of Barratt Developments and Taylor Wimpey will, in all likelihood, remain stable investment destinations in the years ahead.

The FTSE 250 isn’t exactly short of such attractive construction stocks, either. Take Telford Homes (LSE: TEF), for example. Its share price has fallen 12% over the past 10 weeks as the market has digested news concerning the state of the London market and considered what impact this will have on Telford.

I’m not so worried, however. While demand in the capital has indeed taken a whack in the wake of the 2016 European Union referendum, this has predominantly affected properties at higher price points. By contrast, Telford hasn’t really witnessed a significant demand falloff for its own newbuilds.

Indeed, Telford chief executive Jon Di-Stefano commented earlier this month that “the London housing market at our typical price point has remained robust, with ongoing demand from a broad base of customers.” Sure, it has to work that little bit harder to offload its properties at higher price points, but it said that its homes above £600,000 “continue to sell at a steady rate.”

Perky profit prospects

The chronic homes shortage in London and the surrounding areas isn’t the only reason I’m tipping Telford to continue creating strong profits growth.

The company’s sterling progress in the fast-growing build-to-rent sector also provides ample opportunities going forward, particularly as this segment of the housing market remains pretty underexplored in the UK compared with many countries in Europe and further afield. Di Stefano added earlier this month that “our activity in this burgeoning sector is helping to increase the scale of the business and will enable us to build on our substantial development pipeline of over 4,000 homes.”

Against this backcloth, City boffins are expecting the business to report an 11% earnings rise in the year to February 2019, and to follow this up with an additional 4% advance in fiscal 2020.

Clearly, these numbers aren’t heady enough to excite growth investors but they lay the foundation for dividends, which have already doubled over the last five years, to keep ripping higher. Last year’s 17p per share reward is anticipated to rise to 18.7p in the present period, before charging again to 19.3p next year.

As a consequence, yields for fiscal 2019 and 2020 stand at 4.5% and 4.7%, respectively.

The aforementioned share price weakness at Telford means that it now changes hands on a forward P/E ratio of just 7.4 times, some way inside the territory of 15 times that signals excellent value for money. At these levels, I believe the housebuilder is difficult to resist.

Stunning results

Hays (LSE: HAS) may be a little more expensive than Telford Homes, the recruitment specialist currently changing hands on a prospective P/E ratio of 16.2 times. While slightly toppy on paper, this valuation is not at all undemanding in my opinion given the FTSE 250 firm’s rising might across the globe.

Last time I covered Hays I said that the business could be a wise investment in the run-up to fourth-quarter trading details that were broadcast in mid-July. So it came to pass as the firm’s share price leapt to fresh record peaks of around 208p per share in the aftermath of the release.

The trading statement showed that like-for-like net fees grew 15% year-on-year between April and June, speeding up from the 10% increase printed in the prior three months. Hays’s recent update again highlighted the scintillating opportunities in its overseas markets. Net fees in its international businesses jumped 18% from the corresponding 2017 period, with growth hitting double-digit percentages in 24 of its 33 non-UK territories.

Against this backdrop, it’s no mystery as to why City brokers are therefore expecting earnings growth to have stepped up a level more recently. A 16% advance is predicted for the year ended June, and another 10% rise is forecasted for the period just started. Just like last year’s figure, I fully expect fiscal 2019’s estimate to be regularly upgraded as the year progresses.

Dividends set to keep climbing

But, as the title of this piece suggests, Hays isn’t just a great stock for growth investors to pile into. The rate at which profits are expected to keep expanding means that the number crunchers are expecting the special dividends to keep on coming. That means last year’s total payout of 7.47p per share is predicted to improve to 8.7p in the year just passed, and again to 9.9p for the current year. This means the jobs giant carries a large 5% yield.

Now, unlike Telford Homes, these dividend figures are not covered by anticipated earnings of 2 times or more. In fact, a figure of 1.2 times falls well short of the broadly-accepted security watermark. This is no worry to me, however, due to the company’s exceptional cash generation. The rate at which Hays is churning out the readies meant that it ended fiscal 2018 with £123m worth of net cash on the balance sheet, versus £5m a year earlier.

It’s no surprise that Hays is investing heavily to fully capitalise on this favourable trading backcloth, and particularly in the hot growth areas of France, Germany and the US. The company is one of the hottest growth and dividend prospects on the FTSE 250, in my opinion, and I’d be very happy to load up on the business right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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