1 cheap FTSE 250 stock I’d buy for its 6% dividend yield

The FTSE 250 stock is not just undervalued in Manika Premsingh’s opinion, it also has a healthy and sustainable dividend yield. What’s not to like?

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I have to admit I am getting a sense of deja-vu writing this article. Here’s why. Just yesterday, I wrote about the FTSE 100 housebuilder Persimmon, which looks cheap to me and also has a good dividend yield. The same is true for the FTSE 250 real estate company Vistry Group (LSE: VTY), which released its results yesterday. 

Strong results for Vistry Group

The company’s revenue increased by a solid 30% in 2021 from the year before. Its earnings per share (EPS) rose up by an eye-watering 229%! And its net cash rose even more, by almost 516%. Of course some of this is because of the correction in 2020 on account of the pandemic. Clearly, its earnings and cash position have benefited from a low base effect. But that still does not explain its revenues, which rose by a huge 60% in 2020. Vistry Group is evidently doing something right.

Sustainable dividend yield

Considering how good the year has been for Vistry, it is little surprise that the housebuilder also increased its dividend to 60p in 2021, up by three times from 2020. This brings its dividend yield to 6%, which is significantly higher than the 2.4% average yield for FTSE 250. Importantly, it is also higher than the average expected inflation rate of 4% for 2022. In other words, I can expect a positive real yield from the stock.

In fact, it is possible that if I buy the stock today, I might end up with an even higher yield this year. This is because the company is positive on its future earnings, which could spill over into bigger dividend payouts. While it does not provide a number in its outlook, it does expect to “deliver a significant step up in profits and returns in 2022”.

Cheap FTSE 250 stock

And yet, the stock has a relatively low market valuation, in my view. At 8.6 times, after its latest results, its price-to-earnings (P/E) is likely to rise significantly higher in anticipation of higher earnings. Actually, this is my perspective on almost the entire FTSE listed real estate set. While it saw a big rise as the government stimulus boosted the real estate market during the pandemic, it has over-corrected. This is evident in the fact that these stocks’ prices are now trading below pre-pandemic levels. In the case of Vistry Group, the share price is around 50% lower! And this is when its latest profits have far surpassed pre-pandemic levels. 

What I’d do

So far, economic growth is good too, so I expect that its performance should be positive, as it expects as well. Of course, with a war going on in Europe, I am keeping my fingers crossed, but so far my investing decisions are not based on geopolitical risks. I’d buy this FTSE 250 stock right away.

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.

Manika Premsingh owns Persimmon. The Motley Fool UK has no position in any of the shares mentioned. 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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