The mid-sized companies of the FTSE 250 are often associated with growth, but some of the best dividend shares in my portfolio are also FTSE 250 members.
Today I want to look at three of these companies, all with dividend yields over 5%.
10% yield from a household name?
My first pick is home and motor insurer Direct Line Insurance Group (LSE: DLG).
This well-known firm has a big share of the UK market, but conditions are difficult at the moment. Soaring used car prices and repair costs have put profits under pressure.
Direct Line’s share price fell recently, after the company has admitted that profits would be lower than expected this year. This slump has left the stock with a tempting 10% dividend yield.
How safe is this bumper payout? In my view, Direct Line can probably hold its dividend if the group’s profitability recovers next year. CEO Penny James says this should happen, as insurance price rises feed through.
The main risk I can see is that it will take longer than expected for profits to recover. If that happens, I think a dividend cut could be needed.
Personally, I’m happy to accept the risk of a cut. I think Direct Line is a good business with a solid future. On balance, I think the shares offer good long-term value at this level.
Profit from market volatility
Financial trading firm IG Group (LSE: IGG) is best known for its spread betting and CFD services, which are popular with UK retail investors.
I’ve owned this stock for several years and it’s served me well during uncertain times. Profits hit record levels during the pandemic, as volatile markets boosted trading activity.
IG is the market leader in this sector. The group boasts an operating profit margin of more than 40% and strong cash generation. However, the maturity of the UK market means that growth opportunities at home may be limited.
To address this, CEO June Felix has bought US options trading firm tastytrade to use as a launchpad into the US market. If she’s successful, then I think the potential growth is huge. The risk is that the US market is tough and competitive — success won’t be easy.
The good news is that I don’t think the market is pricing in much US growth yet. IG shares trade on just nine times forecast earnings, with a dividend yield of nearly 6%. I view the stock as a buy for income.
An underrated bank
My final pick is FTSE 250 merchant bank Close Brothers (LSE: CBG). This £1.7bn bank specialises in commercial lending, car finance, and stockbroking. It’s not exactly a household name, but Close has been in business since 1878 and is well-respected in the City.
Until 2020, Close Brothers hadn’t cut its dividend for more than 30 years. The payout is already back to 97% of its pre-pandemic level, with a further increase pencilled in for the year ahead.
Like all banks, Close Brothers faces the risk of rising bad debts if the UK goes into recession. But the company’s long track record and solid profitability suggest to me that the situation will be manageable.
With a 5.7% dividend yield and long-term growth prospects, Close is on my buy list.
