When buying stocks to generate a passive income, FTSE 250 companies are not my first choice. The reason is simple. The average FTSE 250 dividend yield is pretty low, at around 1.9% right now. If I had to buy dividend stocks, I would much rather consider FTSE 100 stocks, which on average offer some 3.5% yield.
There are exceptions to the rule, however. Some FTSE 250 stocks offer comfortably over 4% dividend yields right now. The 4% level is important to me, because this is the going rate of inflation. In fact, the UK government expects inflation to average 4% in the next year as well. And I would like to earn a positive real return, which is just not possible with a passive income below this rate.
Tate & Lyle: FTSE 250 stock with 4.6% dividend yield
One FTSE 250 stock I like with relatively high dividend yield at 4.6% is Tate & Lyle (LSE: TATE). The food ingredients’ supplier has been consistently profitable for a while, which gives me encouragement that its dividends could continue. It even increased its interim dividend by 2.3% earlier this month. But there are two aspects that I am watching out for.
The first is, that it is splitting its business into two parts. One of these will retain the original name and focus on food and beverage solutions in speciality markets. The other one will focus on plant-based products in food and industrial markets. While this may just turn out to be a positive for the company, I would look out for how things proceed.
Next, the company’s share price has been falling since earlier this year. It has almost wiped out all gains made in last year’s rally following the development of Covid-19 vaccines. At the same time, it is profitable and pays good dividends. It could be undervalued right now, which is why it is attractive to me as an income stock to buy for my portfolio.
Greencoat UK Wind: 5.3% yield for the renewable energy stock
The next FTSE 250 stock I like is the renewable energy fund, Greencoat UK Wind (LSE: UKW), which has an even higher dividend yield of 5.3%. The company, which invests in wind farms, has returned an average dividend yield of 5.2% over the past five years, which is an encouraging sign from the word go. It has also been consistently profitable, even though the profit amounts have fluctuated, which is more positive than not.
Its share price has not gone anywhere since the pandemic happened, but I reckon that can change. Green growth is big on policy agendas not just in the UK but also globally. So, even though renewable energy stocks like this one are doing just about ok for now, I reckon that they can do much better over the next decade as the sector matures. And in the meantime, I earn 5%+ dividend yields from the stock. What is there for me to lose? I’d buy the stock now.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.