Which FTSE 250 dividend stocks to buy?

There are multiple FTSE 250 dividend-paying stocks. Here’s how I would cut the list down to size and identify the ones I would consider buying.

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There are plenty of dividend stocks in the FTSE 250, which can be a problem when deciding which ones I might want to buy. But before I get into cutting the list down to size, I should define what I think a good dividend-paying stock is.

Although I start by looking for big dividend-yielding stocks, the yield alone is not enough information. Since the yield is the dividend per share divided by the price per share, an inflated yield could come from a stock price decline in anticipation of a dividend cut. What I want is a good yield when I first buy. Then, I want the dividend payment to grow, or at the very least be maintained.

Companies typically pay out a proportion of earnings as dividends. So if earnings continue to grow, then so should my dividend. So, what keeps earnings going upwards? Stable or growing revenues is the first thing I need. That might rule out companies in cyclical or boom and bust industries like mining. The next thing I want is low debt. That’s because debt holders are paid before shareholders, and I don’t want large interest payments gobbling up earnings.

FTSE 250 dividend stocks

I started by finding the 10 FTSE 250 dividend stocks with the highest yields. I then excluded anything that had a consensus rating of sell or worse. Others had to go because of impending takeovers. I was left with six FTSE 250 dividend stocks.

Company Industry Dividend Yield Earnings per Share Dividends per Share Coverage ratio 5Y Earnings Growth Total Debt to Total Capital
Diversified Energy Company Oil & Gas 11.56% -2.32p 11.56p -0.2 n/a 45%
Plus500 Financial Services 8.12% 345p 106.69p 3.23 44% 0%
Direct Line Insurance Non-life Insurance 7.66% 25.5p 22p 1.16 7% 28%
CMC Markets Financial Services 7.02% 61.19 30.63p 2.00 46% 4%
ContourGlobal Electricity 6.37% 2.2p 12.3p 0.18 -19% 93%
Jupiter Fund Management Financial Services 5.95% 20.12p 17.1p 1.18 -6% 5%

I would ignore Diversified Energy Company, as it is in a cyclical industry. I will pass on ContourGlobal and Jupiter Fund Management because of negative earnings growth and/or high debt. The coverage ratio is earnings per share divided by dividend per share. It is a measure of how safe the dividend is. I like coverage to be greater than two, which excludes Direct Line Insurance.

I am left with Plus500 and CMC markets. I wrote about both companies in July 2020. Both have benefitted from the surge in online trading during the pandemic. How much of this will stick after the pandemic passes is anyone’s guess.

How can I earn £500 a month with dividend stocks?

Another interesting question is, what kind of portfolio values and what kind of portfolio dividend yields would I need to earn £100, £250, or even £500 a month in dividend income? Dividend yields are calculated on an annual basis. So monthly amounts are averages. For example, for a £500 per month payment, I would need £6,000 in dividends per year. I could expect that from a £300,000 portfolio with a 2% dividend yield. A £50,000 portfolio yielding 12% would also work in theory. Smaller monthly amounts require smaller portfolio values for the same yield. I have constructed a table for reference below.

£500 per Month £250 per Month £100 per Month
Portfolio Dividend Yield Portfolio Value Portfolio Dividend Yield Portfolio Value Portfolio Dividend Yield Portfolio Value
2% £300,000 2% £150,000 2% £60,000
4% £150,000 4% £75,000 4% £30,000
6% £100,000 6% £50,000 6% £20,000
8% £75,000 8% £37,500 8% £15,000
10% £60,000 10% £30,000 10% £12,000
12% £50,000 12% £25,000 12% £10,000

A £50,000 portfolio yielding 6% should generate the equivalent of £250 per month. But, I need to remember that in investing, expectations may not always match reality.

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.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management. 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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