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FTSE 250: Passive investing for income is a stock buying strategy I like

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Business development to success and FTSE 100 250 350 growth concept.
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The FTSE 250 Index contains many UK-centric companies suffering because of the coronavirus pandemic. As such, the index remains down over 10% year-to-date. Nevertheless, as the vaccine rollout begins, it looks like 2021 could be a comeback year for the FTSE 250 and a good place to begin a passive investing stock buying strategy. 

Passive investing for income

When it comes to passive investing for income via the stock market, most people think of exchange-traded funds (ETFs) or investment trusts. But you can achieve a hands-off passive investing approach by buying individual dividend stocks, too.

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I like to follow a buy-and-hold strategy. Waiting it out, over good times and bad, has historically paid off for patient investors. And by passive investing for income, the rewards can quickly multiply, thanks to the power of compound interest.

Dividends are paid out once, twice, or even four times a year depending on the company’s dividend payment policy. By automatically reinvesting these payments, it’s like receiving interest on your initial investment. This helps your capital to grow and each time it accrues another dividend payment, it’s like earning interest on your interest. That’s how compound investment works, and your starting pot can quickly snowball.

FTSE 250 dividend favourites

The FTSE 250 contains several quality businesses that offer recurring income via dividends. Some of these UK stocks include PZ Cussons (LSE: PZC), Direct Line, Plus500, Man Group,and Contour Global (LSE:GLO).

PZ Cussons owns a lot of desirable brands including Sanctuary Spa, Original Source shower gel, and its market-leading Carex soap and sanitiser. The company’s price-to-earnings ratio (P/E) is very high at 49. Earnings per share (EPS) are 4.6p and the dividend yield is 2.5% based on an annual dividend of 5.8p. PZ Cussons recently cut its dividend by 30% to make it more sustainable for the future. I think this was a good move and will strengthen it long term as it frees up more company funds to invest in its brands and growing the business.

The leadership team has been shaken up this year with several key figures leaving and some newcomers being appointed. They have good credentials and appear to be committed to turning the business around. I like PZ Cussons, although its high P/E is a little off-putting. I think the company looks like it’s got growth and sustainability in mind. Considering it also offers a dividend, I would consider investing for the long term.

Developing hybrid and renewable technology

Contour Global is another FTSE 250 dividend stock with income earning potential. It’s a company growing its fleet of natural gas-fired assets, through mergers and acquisitions. In the past week, it announced it’s buying 1.5 gigawatts of power plants in Texas, New Mexico, and Trinidad and Tobago. The transaction will cost $837m on a cash and debt-free basis. It’s a relevant addition to its current operations in the region, helping to scale its potential. And it gives the company scope to move into supporting battery storage and hybrid technology.

CFO Stefan Schellinger said the company’s overall focus is on generating cash for the business to redeploy. It’s also keen on paying and growing dividends. EPS is currently 3p, its P/E is 70, and the dividend yield is 5%. This deal should boost EPS within two to five years, so it’s a long-term play. I like the look of this business but think it’s too expensive at today’s prices.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended PZ Cussons. 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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