The UK’s mid-cap index, the FTSE 250, currently has an average dividend yield of about 3.5%. That’s decent enough for a bit of income, but it won’t deliver groundbreaking passive income.
For something a bit meatier, I like the look of two shares that offer roughly double that.
Aberdeen Group
Aberdeen Group (LSE: ABDN) is a UK asset manager and investment business that earns revenue from managing funds, offering investment strategies and providing financial services.
Over recent years, it’s rebranded and trimmed costs to sharpen focus.
Its dividend yield sits around 6.9%, almost double that of the index average. With a payout ratio of about 82%, a large portion of its profits is returned to shareholders. That shows dedication to rewarding shareholders but also limits how much capital is reinvested into the business.
It has paid dividends consistently for more than 20 years and its dividend cash ratio (cash available relative to the dividend amount) is about 1.72. Encouragingly, the price also looks comparatively cheap, with a forward price-to-earnings (P/E) of 14.5.
That said, it’s not without risks. A major concern is that its earnings can be volatile, especially in investment management, which is sensitive to markets and flows of assets. If markets dip or fee income falls, profits might shrink and place the dividend under pressure. Also, costs or regulatory burdens in financial services could hit margins.
For income-hounds, the high yield certainly makes it worth considering — but investors should weigh the potential for earnings swings.
Primary Health Properties
Primary Health Properties (LSE: PHP) is a real estate investment trust (REIT) specialising in healthcare property. It owns and leases buildings that host doctors’ surgeries, clinics, medical centres, and related facilities.
Essentially, it aims to earn steady rental income from these long-term leases to health providers.
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The stock offers an even juicier yield of 7.7%, also having paid dividends consistently for over 20 years. Plus, its forward P/E ratio is lower, at 12.6.
However, the payout ratio is high at about 96%, meaning nearly all reported earnings are distributed to shareholders. Plus, its dividend cash ratio is also lower, around 1.05, so dividend coverage is pretty much at its limit.
As a REIT, it’s vulnerable to interest rate rises, which increase borrowing costs and can depress property valuations. If rental income growth slows or tenants come under strain, income may weaken. With such a high payout ratio, there’s little buffer if profits dip, which could risk a cut.
I’ve held Primary Health shares for a long time and I don’t plan to sell. However, based on these stats, I don’t think it’s a top dividend stock to consider right now. Investors may find more attractive REITs on the FTSE 100.
Final thoughts
These are just two of many mid-cap dividend stocks that offer yields well above the average, which is tempting for income-seeking folks.
Aberdeen relies on financial services and faces some cyclicality risks, but with well-covered dividends, I think it’s worth considering.
Meanwhile, Primary Health relies on rental income from health property, which is at risk from interest rate changes and property valuation. With limited dividend coverage, there may be better options to consider this month.
When hunting for high-yielding dividend stocks on the FTSE 250, investors should always take into account dividend coverage, debt levels, and financial results.
