I think the best time to buy dividend shares is when market valuations are out of line with the long-term potential of cash generative companies. Right now, that is exactly what I see with a number of FTSE 250 shares. Here are three that I have on my buy list.
Invest in investment itself
The Jupiter Fund Management (LSE: JUP) share price has dropped 25% over the past 12 months, compared to a decline of just 4% for the FTSE 250. The company reported a net outflow of £3.8bn for 2021, so I think the fall is understandable.
But Jupiter still had £60.5bn in assets under management, and boosted its 2021 net management fees by 18%. The ordinary dividend was held at 17.1p per share, with the 2020 special payment of 3p not repeated. Forecasts suggest the same again for 2022, which would yield 8.4% on the current share price.
The danger is that investors will continue to withdraw funds during 2022, in response to the growing world economic crisis. In fact, I think it’s probably inevitable.
But we’re looking at a trailing P/E of only 6.5 now. And with the 2021 dividend having been covered 1.85 times by earnings, I rate Jupiter Fund Management a buy for my ISA.
Fat insurance dividends
The whole financial sector tends to suffer during economic squeezes. FTSE 250 insurer Direct Line (LSE: DLG) is no exception, with its shares down 14% over 12 months.
But that’s helped push up the forecast dividend yield, which now stands at 8.8%. I don’t know how long that level of payment will hold out, as it is barely covered by earnings. And those earnings have dipped over the past three years.
But Direct Line reported a strong capital position for the end of 2021. And in addition to lifting its final dividend, the company embarked on a further £100m share buyback programme.
The 2021 adjusted solvency capital ratio came in at a healthy 160%, even after dividends and share buyback.
Direct Line’s success appears to be down to its investment in improving its technology platforms, which it reckons boost its competitiveness. CEO Penny James told us that “we believe there is plenty more to come in 2022.“
Biggest FTSE 250 faller
Of my three FTSE 250 picks today, Synthomer (LSE: SYNT) shares have fallen the furthest. The price is down 40% over the past 12 months. The five-year picture is similar, despite the company having posted strong earnings growth over that period.
Synthomer is clearly suffering from a pandemic effect withdrawal. The company makes nitrile gloves and related health and hygiene products (among a wider portfolio). So it was hot stuff while Covid-19 was at its worst, with investor demand cooling off now.
But the company said: “Exceptional levels of profitability in 2021 have enabled the group to make major inorganic and organic investments to significantly strengthen our platform for future growth.“
I suspect the Synthomer share price will continue to underperform as growth investors seek their excitement elsewhere. But I can see sustainable dividend yields of around 5-6%, based on the current share price. I might get me some of that.