Forget the Royal Mail share price. Here are 2 FTSE 250 5% dividend stocks I’d buy

Roland Head regrets buying Royal Mail plc (LON:RMG) and highlights two FTSE 250 (INDEXFTSE:MCX) stocks with 12+ years of dividend growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Down by 55% in one year, Royal Mail has been a painful investment. As I explained in February, I’m waiting for May’s results to gain a fuller picture before I decide whether to sell my shares in the postal operator. But I’m not hopeful. In fact, I don’t see any reason to buy this stock at the moment, given the challenges facing the group.

In my view, there are much better options for income investors elsewhere in the FTSE 250. Today, I want to consider two companies that have cropped up on my investing screens.

Turning waste into cash

Water and recycling firm Pennon Group (LSE: PNN) is one of my top picks in this sector. The company — which operates South West Water and Viridor Recycling — said today that both arms of its business are performing well and are expected to deliver full-year results in line with forecasts.

One thing I like about this business is that it’s not just a water utility. Although the regulated water business should provide predictable returns to help support the group’s dividend, growth opportunities are likely to be minimal.

That’s not the case with recycling, in my opinion. This is an evolving sector that’s only partially regulated. Given our environmental concerns, recycling seems likely to become bigger and more important over the coming decades.

Although the Viridor business is exposed to market pricing for recyclate material, which can be volatile, I think the firm’s strategy of developing large-scale recycling and energy recovery facilities is likely to work well.

Pennon shares look attractively valued and the dividend hasn’t been cut for 12 years. With a 5.3% dividend yield on offer for the current year, I’d be happy to tuck some of these away.

Another 5% dividend grower

Pennon isn’t the only FTSE 250 firm with a long dividend history. Oil and energy services operator John Wood Group (LSE: WG) has increased its payout every year since 2005.

Despite this strong track record, the firm’s shares dipped recently after chief executive Robin Watson said that debt reduction “will be more gradual than originally anticipated.”

Wood Group has historically operated with fairly low levels of debt. But when it acquired rival Amec Foster Wheeler in 2017, it took on Amec’s £1bn net debt as well. Although the combined group’s total net debt fell from $2bn (£1.5bn) to $1.5bn (£1.2bn) last year, further reductions are expected to be slower. This is mostly because the oil and gas sector has not returned to growth as quickly as expected after the 2015 crash.

I’m not worried

I’m not concerned by this. Wood Group’s latest results suggest to me that its core attractions of strong cash generation and stable revenue remain intact. In my view, this is one of the best long-term picks in the energy services sector. The Amec Foster Wheeler deal has diversified the firm’s portfolio and should reduce its long-term dependency on oil and gas.

In the meantime, I think the current valuation reflects the lower pace of growth that’s now expected. At the time of writing, the shares were trading on 10 times 2019 earnings, with a forward dividend yield of 5.1%. I maintain my buy rating.

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.

Roland Head owns shares of Royal Mail.  

 

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »