A lot of attention is paid to FTSE 100 companies, given that these firms are the largest by market cap. Yet it can mean that some great FTSE 250 stocks fly under the radar, especially when it comes to dividend potential. When focusing on trying to put a lump sum of savings to work for passive income, here are some ideas I like right now.
Getting my expectations in order
In order to justify investing my savings in dividend shares, I need to ensure that certain criteria is met. Thanks to the rise in interest rates over the past couple of years, I can earn income simply from putting my cash in a high-interest savings account. There’s very little risk here, even though I can earn 3%-4% on my money.
Therefore, I don’t really see much point in investing to earn less than 3% from the dividend yield of a company.
Another filter I use is historic share price performance. Of course, the past doesn’t always guide for the future. But if a stock has been sharply falling over the past year, it should raise some alarm bells. The risk is that the dividend might be cut going forward, hampering my potential to pick up valuable income.
A case in point
Thankfully, I can still find promising options that tick both boxes. For example, consider Bank of Georgia Holdings (LSE:BGEO). The share price has rallied by 40% over the past year, yet it still has a juicy 6.94% dividend yield.
The dividend per share amounts have been increasing over the past couple of years. I expect the full-year results (due out in early Q2) to come with a larger dividend than 2023. This should further act to push up the yield.
The bank has been able to increase shareholder payouts thanks to much stronger financial results. Of course, it has benefitted from higher interest rates, which the entire sector has profited from. Yet it has also been helped by growing its client base in Georgia at a time when the economy is doing well. After all, the estimated year-on-year real GDP growth in the first nine months of 2023 for Georgia is 6.8%!
As a risk, the growth of the bank is likely capped as it cannot currently compete with larger global players that have much deeper pockets and better infrastructure.
Making the numbers work
If I had £10k in savings that I could deploy right now, I’d target stocks like Bank of Georgia to aim for an average yield of 7%. There are other FTSE 250 companies that have a similar profile that I can buy. With my money split over six-to-12 firms, I think this would give me some good diversification.
If I reinvested the dividends received and didn’t add a penny more to the portfolio, after a decade my pot could be worth £20,096. The following year, this could mean that I’d enjoy £1,400 in income.
This strategy can be tweaked depending on each investor. For example, investing monthly instead of all in one go. Whatever the outcome, it shows the power that smart dividend investing can provide.
