I think this is the best dividend stock to buy in the FTSE 250. And it’s dirt cheap!

This FTSE 250 stock isn’t just a leader in its space. Our writer thinks it’s also a passive income powerhouse trading at a bargain price. But for how long?

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When hunting for dividends, I always make a point of running the rule over stocks below the FTSE 100. And there’s one in the FTSE 250 that I think can bring wonderful income credentials to my portfolio.

Top of the tree

Online trading platform provider IG Group (LSE: IGG) is a market leader. And right now, business at the £3bn cap looks solid.

In its most recent trading update in March, it revealed that total revenue in Q3 hit £240.1m. That’s up on the £229.7m recorded for Q2 and stable when compared to the same three-month period in the previous financial year.

What’s particularly impressive is that this was achieved despite markets showing “the lowest level of volatility in over five years“.

IG makes make more money when markets are choppy. So, if it’s still managing to do well when there’s little going on, I think of how well it should do when greed and fear really kick in.

And we can be pretty sure they will at some point in the future.

Sentiment is improving

For now, it seems like the market is positive on the company. The shares are up 10% in 2024 — nearly double the return of the FTSE 250 as a whole.

Full-year numbers are due in a couple of weeks but I’d be surprised if trading had taken a turn for the worse.

It will also be interesting to read about new-ish CEO Breon Corcoran’s plans for the company going forward.

Dividend demon

A good rise in any company’s share price is nice. But it’s the dividends that I think help IG to stand out.

As things stand, analysts expect the company to return 47.3p per share in cash to its owners in FY25 (ending next May).

Sure, this is just a forecast and subject to change. At the current price, however, it becomes a chunky dividend yield of 5.7%.

For comparison, the FTSE 250 as a whole yields only 3.3%.

So, it is worth the extra risk?

Crowded market

Well, one thing worth noting is that this space is often a target for regulators.

Ensuring that only those capable of truly understanding what they’re doing should be allowed to buy and sell complicated financial instruments is never a bad thing. But any stringent new rules could potentially reduce the number of clients on its books.

IG also faces stiff competition. That’s no surprise given its operating margins are usually between 40% and 50%. So, it simply can’t afford to rest on its laurels.

All in the price?

On a positive note, the stock trades on a price-to-earnings (P/E) ratio of just 8. That’s cheap relative to companies in the financials sector and the general market.

Some of this arguably takes into account the concerns raised above. But when IG’s very healthy balance sheet is factored in, I reckon it looks like a steal.

It’s also worth noting that the shares have climbed 40% since 2019. That’s a decent return, boosted further by those lovely dividends, and one that absolutely smashes the paltry 5% gain in the FTSE 250.

Having owned the stock many moons ago, I’m strongly considering buying back in when cash becomes available.

That passive income stream — covered over twice by predicted profit — looks too good for me to resist.

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.

Paul Summers 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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