When it comes to building a beefy passive income portfolio, FTSE 250 stocks might not be the first thing that springs to mind.
However, the FTSE 250 has historically produced higher returns compared to the FTSE 100 once share-price appreciation is included. In fact, the FTSE 250 has produced almost twice the returns of its mega-cap counterpart over the past 20 years.
I see a number of undervalued, dividend-paying companies on the FTSE 250 right now that could benefit from big tailwinds.
Therefore, if I had £50,000 to build a dividend portfolio from scratch, I’d spread it between a number of FTSE 250 stocks.
Ageing population boom
First, I’d invest a portion of that £50,000 in Primary Health Properties (LSE:PHP). This real estate investment trust (REIT) owns health centres and GP surgeries in the UK and Ireland. It offers a competitive yield of 6.45%. Furthermore, it has increased its dividend for 27 years consecutively – earning it a spot in the much-revered Dividend Aristocrat club.
According to the ONS, one in four people in the UK will be aged 65 and over by 2050. That compares with just one in four in 2019. Since older people tend to need more healthcare services, that suggests a boom in demand for the kind of facilities that PHP owns.
Of course, a risk that must not be understated when investing in PHP is the company’s dependency on government contracts. A shakeup in healthcare policy could seriously challenge PHP’s business model. As a REIT, PHP also offers some tax advantages.
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Kuala Lumpur calling
Next, I’d allocate another portion to Anglo Eastern Plantations (LSE:AEP), which produces 500,000 metric tonnes of crude palm oil a year from its properties in Malaysia and Indonesia. This overlooked FTSE 250 gem yields 3.29%, and its balance sheet is a picture of perfect health, with just £100k of debt compared with £223m of cash.
The global population is set to grow by 2bn over the next 30 years, meaning more demand for basic commodities. Palm oil is a cheap source of fats, and it is used to make recession-proof products like cooking oil, margarine, and soap. Of course, geopolitical instability in Indonesia and Malaysia could be flies in the proverbial palm oil.
Crunching the numbers
Investing across these two stocks would average a yield of approximately 4.87%.
A full £50,000 investment could generate around £2,435 in the first year. However, to minimise risk, I would diversify further across at least 10 different FTSE 250 stocks.
Let’s assume the rest of my FTSE 250 high-yield stock picks average a 5% yield. On the full £50,000, this could provide £2,500 in the first year. Dividend stocks reveal their true benefit over time, especially when dividends are reinvested to buy more shares.
Based on the FTSE 250’s historic annual return (of dividends and share-price growth) of 7.7%, my £50,000 investment could potentially grow to around £462,851 over 30 years. At a 7.7% yield, this would generate a passive income of approximately £32,640 a year.
This projection, though based on historical performance, isn’t guaranteed. Stock picks could grow at different rates, and yields might fluctuate. In the event of a market downturn, I’d wait for a recovery and continue investing in more shares at lower prices.
