One FTSE 250 stock I think is perfect for passive income and diversification!

This Fool explains why this FTSE 250 stock can offer her a great rate of return, as well as providing exposure to many different sectors.

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Two key focuses of mine for my holdings in 2024 and beyond are consistent returns and diversification. FTSE 250 incumbent City of London Investment Trust (LSE: CTY) hits the nail on the head for both of these. Here’s why!

FTSE investor

City of London is set up as an investment trust. Pooled money is used to buy shares in different stocks across the UK’s index. The aim of the trust is to provide investors with consistent growth and returns.

To give you a flavour of some of the stocks in the trust, it holds positions in blue chips such as British American Tobacco, HSBC, Unilever, and BAE Systems.

Before I dive into the bull and bear case, let’s review City of London’s recent share price performance. Over a 12-month period, the shares are down 5%, from 425p at this time last year, to current levels of 400p. Over a five year period, they’re up 0.5%.

My investment case

I’m looking to diversify my holdings, as well as ensure I’m exposed to stocks that provide returns. Buying shares in the City of London Investment Trust would do just that.

Starting with diversification, I’m able to gain exposure to some of the biggest and best businesses across the FTSE, all with one investment. The great thing about the trust is that it focuses on well-established, mature businesses with lots of information readily available. Remember, small caps and start-ups usually come with lots more volatility than larger, more established companies.

Moving onto returns, a dividend yield of 5% right now is above the FTSE 100 average of 3.8%. This is even more so the case when my research shows the trust has close to 50 years of increasing and consistent pay outs. However, I’m conscious that the past is not an indicator of the future.

Despite my bullish stance on City of London shares, I do note there are a couple of risks. Firstly, dividends aren’t guaranteed and are only ever paid at the discretion of the business.

The main risk I find myself pondering is that of the overall performance of the FTSE linked to economic performance. The UK economy has been struggling in recent years, and even before the pandemic. This goes as far back as the initial rumblings of Brexit. Foreign investment has cooled in recent years. Plus, a decent indicator of progress is that US and European stock markets have outperformed the FTSE by some distance in recent years. Continued volatility could be bad news for the trust’s performance and level of return.

What I’m doing now

Despite recent economic issues and stock market volatility, I still think City of London Investment Trust is a great buy for me. It can offer me diversification and solid returns too. Looking forward, if economic volatility subsides, I reckon I’ll be looking at great returns and capital growth.

I’m unable to buy every stock I’m bullish about. But as soon as I have some spare cash to invest, I’ll be buying some for my holdings.

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.

Sumayya Mansoor has no position in any of the shares mentioned. 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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