The FTSE 250 is usually the hunting ground of growth investors. Anyone after income stocks normally focuses on the FTSE 100, but they’d be missing a trick.
Yes, companies on the FTSE 100 are larger so their capacity to pay dividends is greater. And the smaller size of the FTSE 250 shares gives them more scope for growth. But income hunters might be surprised to learn that over 50 FTSE 250 shares currently yield over 6% — led by Diversified Energy with a whopping 18.36% trailing yield.
As I’m already overweight in energy shares, I’ve skipped over DEC in favour of specialist mortgage lender OSB Group (LSE: OSB) and real estate investment trust (REIT) Tritax Eurobox (LSE: EBOX). Both stocks sit on the FTSE 250, have an appealing dividend of over 8% and great potential for growth. Plus they’ve both had a tough year after interest rate revisions sent shares tumbling.
First up, OSB
Down 26% this year, the first thing you notice looking at the share price performance chart is the cliff-like fall in the first week of July.
Skittish buy-to-let mortgage holders — who make up the bulk of OSB’s loan book — refinanced quickly after the end of their teaser rates, which was bad news for profits. An unscheduled update to the market on 6 July, revealing a £160-180m adverse effective interest rate adjustment would be seen in OSB’s first-half figures, sent the share price tumbling 30%.
The following set of results were in fact better than expected, but didn’t prompt the share price recovery I anticipated.
Interest rates look stable for now and the early summer panic represents a buying opportunity in my view. Analysts have given a 700p target price compared to yesterday’s close of 303p. I think a 131% gain is optimistic, but there’s certainly great potential and the generous dividend will make the wait for profit palatable.
Interest rate fears have also hit Tritax Eurobox shares. The REIT owns warehouses and logistics hubs across continental Europe, making it vulnerable to increased cost of borrowing. Down 21% since the new year, I believe interest rate worries have knocked the share price back as far as they will.
Exposure to Europe
The basic economics of supply and demand suggest Tritax Eurobox is in a great place for a comeback. Shoppers are buying online more than ever, and the rising use of automation and robotics all point towards ‘big box’ logistic hubs and warehouses becoming increasingly vital to the retail market. A dividend yield of 8.75% is the cherry on top and one I’m confident will be maintained.
OSB and Tritax Eurobox are by no means the only bargains for income seekers lurking in the FTSE 250. But for me, they’re the ones with the strongest investment case.
Tritax Eurobox would bring much needed European exposure to my portfolio with a solid dividend and a likelihood of long-term gains. But I’m an impatient investor and find the short-term expectations for OSB are hard to ignore. Without spare cash to invest, I’m considering selling some of the less-compelling stocks in my portfolio to fund a purchase.
