While investing in FTSE 250 dividend growth stocks may seem to be a risky move at the present time, high returns could be on offer over the long run. Although the UK’s economic outlook may impact on the index in the short run, a number of mid-cap shares appear to offer wide margins of safety.
With that in mind, here are two FTSE 250 stocks that could have bright futures as a result of their low valuations, dividend growth potential and strategies.
Home furnishings retailer Dunelm (LSE: DNLM) released a positive trading update on Thursday that sent its share price around 5% higher. The company’s performance over the last couple of months has been better than expected, with like-for-like sales growth being strong.
As a result, the company now expects pre-tax profit for the full year to be between £124m and £126m. This equates to an upgrade versus previous expectations, and would represent significant growth versus the prior year’s £102m.
Looking ahead, Dunelm faces an uncertain set of operating conditions. Consumer sentiment could come under pressure depending on how Brexit progresses. However, with wage growth ahead of inflation, its income investing prospects could continue to improve.
With the company having a dividend coverage ratio of 1.6, its potential to grow dividends seems high. Although it yields just 2.8% at the present time, a rapidly-rising bottom line may mean it’s able to increase shareholder payouts at a fast pace.
Since the stock trades on a price-to-earnings growth (PEG) ratio of around 1.8, it seems to offer fair value for money given its long-term growth prospects under an increasingly online-focused strategy.
The prospects for housebuilders such as Bellway (LSE: BWY) may also be somewhat uncertain at present. Sentiment towards the housing market is mixed, with some regions of the UK experiencing growth and others facing more challenging outlooks.
Bellway’s financial prospects, though, appear to be sound. The company is forecast to post a rise in net profit of 5% in the current year, with demand for new homes likely to remain robust as a result of the Help to Buy scheme.
Despite this, the company’s shares trade on a price-to-earnings (P/E) ratio of just 6. This suggests they offer a wide margin of safety, and may deliver significant capital growth over the long run.
With the stock having a dividend yield of 5.4% from a shareholder payout that’s covered three times by net profit, the income investing potential of the business seems to be high relative to many of its index peers.
Although there may be more resilient and popular shares available within the FTSE 250, Bellway seems to offer a mix of income and value investing potential that could lead to impressive total returns relative to the index over the long run.
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Peter Stephens 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.