The FTSE 250 currently has a lower average dividend yield than the FTSE 100. Yet within the index, individual stocks have generous yields that still rival the FTSE 100 counterparts. With this being the case, here are some of my favourite passive income ideas from the FTSE 250 index at the moment.
High passive income options
Two companies that operate in the same area are CMC Markets (LSE:CMCX) and Plus500 (LSE:PLUS). Both are retail trading and investment platforms. They offer a range of services across the investing spectrum. For example, spread betting is a leveraged way of buying or selling stocks, FX, and other instruments. This is a high-risk way of trading, but with potentially high rewards.
During the pandemic, the volatility in financial markets saw a surge in account openings and trading activity for both companies. Money is made by taking a small spread off each transaction. So the more that clients trade, the more profitable it is for CMC and Plus500.
As a result, both companies were able to pay generous dividends out of the profits during this period. In terms of passive income, both FTSE 250 stocks have a dividend yield above 6%. This puts both within the top 10 highest yielding stocks within the index.
The risk here is that both companies need to adapt to keep the growth going. If retail participation slows, they need to be able to generate revenue from other sources, such as ISAs, more crypto offerings, and other services. The client base that has been generated is golden, but these companies need to ensure clients remain active, otherwise revenue will dry up during quieter times.
Defensive FTSE 250 stocks
Another area within the FTSE 250 for passive income ideas is within consumer staples, for example, PZ Cussons (LSE:PZC) and Tate & Lyle (LSE:TATE). PZ Cussons owns brands such as Carex and Imperial Leather. Tate and Lyle is a well-known sugar supplier.
Both companies should continue to offer me good dividends into the future. By nature of the products sold, customer demand should remain constant irrespective of what happens to the UK economy in the coming year. I say this because there are concerns about the negative impact of the current political situation, Brexit issues, high inflation, and so on.
Even if all of these things blow up, I’ll still need to buy sugar and soap! This is one reason why I’m happy to consider buying shares in both FTSE 250 stocks.
The risk here is that supply chain disruption could hamper stock levels even if demand is present. In fact, in a recent result presentation, Tate & Lyle noted that sweeteners and starches profit was down 13% “due to cost inflation and operational and supply chain disruption”. If this continues, then it could hamper future dividend payments.
Ideas for right now
Overall, I’m considering buying shares in all four of these passive income ideas. The FTSE 250 stocks offer me alternatives to the main index, and I think there’s good value to be had.
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Jon Smith has no position in any share 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.