I have been looking for income stocks to buy for my portfolio to boost my income in the current interest rate environment. So here are five FTSE 250 stocks I would buy based on their income credentials.
Profit margins
A lot of investors tend to concentrate on dividend yields when looking for income stocks.
I think that’s a mistake. So instead, I focus on profit margins as I reckon firms with larger profit margins will have more cash available to return to investors. That could lead to sustainable dividend growth.
Of course, this is not guaranteed. Dividend income is always unpredictable, as dividends are paid out of profits. So if a company’s profits suddenly plunge, as they did last year, managers may have no other choice but to cut their dividends.
Still, by focusing on companies with large profit margins and attractive yields, I can improve my odds of success.
FTSE 250 income stocks
The first company I’d buy for my portfolio of FTSE 250 income stocks is Ninety One. My figures show this asset management group has an operating profit margin of 28% and a dividend yield of 5.3%.
As one of the UK’s largest asset and wealth managers, the group benefits from economies of scale. I think it should be able to use these economies to capture market share and grow its dividend in the years ahead. However, its main risk to growth is competition.
If Ninety One has to lower charges to compete with lower-cost peers, the company’s profit margins may fall, which could impact profits.
Staying in the financial sector, I’d also buy Sabre Insurance and OSB Group for my portfolio of FTSE 250 income stocks. These firms yield 4.2% and 3.1%, respectively. In addition, they have operating margins of 28% and 55%, although due to the quirks of financial company accounting, these figures are a bit misleading.
However, I’m confident that both of these firms, which have carved out a niche in their respective markets (insurance and buy-to-let lending), can use their advantages to continue to grow.
The main risks these enterprises may have to deal with are falling insurance rates and low-interest rates. Both factors could weigh on profit margins.
Property and utilities
I think storage group Big Yellow also deserves a place in my portfolio. With a yield of nearly 3%, the company benefits from a steady income from the clients using its storage facilities. It returns a percentage of this income to shareholders and reinvests the rest.
The most considerable risk to its growth is debt. Big Yellow has racked up a lot of debt to fund its expansion. An increase in interest rates could lead to increased costs, which may force management to curb shareholder returns.
Finally, I’d buy Pennon Group for my portfolio. The utility company is a highly defensive business.
Consumers will always need water, and Pennon owns the assets to provide this resource. The stock yields 4.2%.
The biggest risk to this yield is the regulator Ofwat, which controls how much profit Pennon is allowed to earn. A regulatory clampdown could force management to reduce the dividend.
