Why I’d buy this FTSE 250 share to generate a second income in retirement

I like these two FTSE 250 (INDEXFTSE: MCX) stocks for long-term income, but I’d only buy one of them today.

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Twenty pound notes in back pocket of jeans

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Dunelm (LSE: DNLM) shares gained 12% Wednesday morning, and have now soared by 80% over the past 12 months. That brings two possibilities to mind. Are they going to keep on rising, or is this a growth share that’s set for a fall?

To put it into perspective a little, the share price is up 39% over five years, and it only started its recent climb at the end of 2018.

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Wednesday’s interim results were behind the latest uptick, with revenue up 6% over the first half last year. Pre-tax profit rose by 19.4% to £84.9m, and the firm lifted its interim dividend by 6.7%. Free cash flow is down 29%, but at £64.4m I don’t really see anything to worry about.

There’s net debt of £67.7m on the books (excluding IFRS 16 lease liabilities). But that’s of the same order of magnitude as six months of free cash flow, so no problem.

Growth

Where’s the growth coming from? Like so many retail businesses these days, online sales are making a significant contribution. The firm reported growth in tablet-based selling and click & collect (plus footfall too, so traditional shopping isn’t dead), saying the launch of its new digital platform is “enabling a new phase of growth for Dunelm.”

My big issue is valuation, with the shares on forward P/E multiples above 20. I think that’s too steep for a soft furnishings retailer — or almost any retailer.

I like Dunelm’s long-term income potential, but I see better buying opportunities ahead.

Health

I mentioned on Monday that I’m keeping my eye on Primary Health Properties (LSE: PHP), whose shares are up 40% over the past 12 months. It’s another stock that I see as likely to provide steady long-term income, but also another that’s possibly on a bit of a heady growth valuation.

Analysts are bullish for the next couple of years, and I think 2019 results released Wednesday support that optimism.

Managing director Harry Hyman described the year as transformational, with the merger with MedicX the key event of the year. It was completed in March, and Hyman described it as “bringing together two high-quality and complementary portfolios in the UK and Ireland.” He added that it “provides a much stronger platform for the future and has already created significant value.

Income

Net rental income for the year increased by 51%, with adjusted EPRS earnings up 62%. On a per-share basis for the merged company, EPS gained 5.8% and the dividend was lifted by 3.7%.

With an adjusted net asset value per share of 108p, the shares are currently priced at a premium of 51%. Is that too high? Well, I can only see demand for Primary Health’s healthcare real estate growing in the coming years. It’s also immune to factors that effect residential property, and is not at risk from retail pressure on the wider commercial sector.

We might see better buying opportunities in the medium term. But this is my pick of the two for long-term income with growth potential — and one to maybe top-up in any dips.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties. 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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