Looking for passive income? 1 FTSE 250 stock I’d buy and 1 I’d avoid like the plague

This Fool reckons the FTSE 250’s one of the best places to seek shares offering income. Here’s one he likes and one he really, really doesn’t.

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The FTSE 250‘s home to companies offering some of the most attractive dividend yields out there. For investors who are on the hunt for income, I think it’s one of the best places to start looking.

Seventeen businesses on the index offer a yield of 8%, or more. That’s way higher than just five on the FTSE 100. Many people tend to stick to the latter to make extra income, but the FTSE 250’s a great place to go shopping for less-known buys.

With that, I’ve found one stock I’d buy today and one I’d avoid like the plague. Let me explain why.

Steering clear

Despite its impressive 9.2% yield, I’d stay away from financial services provider abrdn (LSE: ABDN).

On paper, its yield, the eight highest on the index, looks incredibly attractive. But there’s much more to it than just a meaty payout.

Dividends are never guaranteed. So more than anything, I look for sustainability when it comes to receiving a payout in the years ahead. With abrdn, I don’t see that.

Its dividend coverage ratio is just 0.95, where a ratio of two or above signals that a dividend is sustainable. That’s a red flag for me. For that reason, I’d look elsewhere.

But even so, there are aspects of abrdn that could make it a smart buy today aside from its risky yield.

For example, it’s a company with strong brand recognition and a large customer base. In Q1, it also showed this is continuing to grow as Interactive Investor, which it acquired in 2021, saw total customers rise from 401,000 to 414,000. On top of that, assets under management and administration also grew 3% to £507.7bn. Even considering that, it’s a stock I’ll be avoiding.

One I like

On the other hand, a stock I like and recently purchased shares in is ITV (LSE: ITV). Its yield isn’t quite as impressive as abrdn’s, but at 6.4%, it’s still a healthy payout.

That’s been pushed higher by its flagging share price. In recent years, the traditional advertising market’s suffered as factors such as rising inflation has seen customers cut back on spending. That will likely continue to be an issue in the years ahead.

But the business is aware of this and is adapting as a result. It’s now more focused on its digital channels, which it plans to grow over the next few years. By 2026, it’s targeting £750m in digital revenues. So far, it’s on track to achieve this.

ITV also has a progressive dividend policy. It paid a final dividend of 5p per share for 2023 but expects this to grow over the medium term. With actions such as its £235m share buyback scheme, it’s also showing it’s keen to keep rewarding shareholders.

Its share price is sitting at 77.3p. That means it’s trading on around 15 times earnings. I think that’s good value for money. As it continues to go from strength to strength in its digital transformation, I’m bullish on ITV. I think it’s a much smarter passive income play than its FTSE 250 peer.

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.

Charlie Keough has positions in ITV. The Motley Fool UK has recommended ITV. 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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