For income investors who simply want to be passive in nature, buying a FTSE 250 index tracker that distributes dividends is one option. However, I know many who prefer to actively select FTSE 250 stocks. One benefit is the ability to boost the average dividend yield. So is it possible to buy several stocks with a yield double that of the 3.25% index? Absolutely.
Filtering carefully
There are currently 27 stocks that fit the initial filter of having a yield of 6.5% or higher. However, I don’t believe all 27 are worth buying. Some in that mix have a high yield right now because their share prices have tumbled 30% or more over the past year. This has artificially boosted the yield, but I think business troubles could lead to a dividend cut in the near future. Therefore, an investor would likely want to avoid those companies.
Within the sustainable-yield group, the next thought is which sectors do I like? A company might have a good track record for income payments, but if I think the sector is going to underperform in the coming years, it might not be a great pick. In my view, finance, telecoms, and renewable energy are three areas that could do well in the coming years.
After adding in that sector filter, I can now clearly see companies with a generous yield that operate in a space I think will do well. This is the sweet spot. In terms of individual names included in this bucket, Ashmore Group (6.88% yield), Telecom Plus (6.95%) and Greencoat UK Wind (10.98%) could all be considered.
Ideally, an investor could look to include these as part of a larger diversified portfolio. The benefit is that if one company cuts its dividend in the future, the overall negative impact on the portfolio is manageable.
Digging deeper
Another example that could be considered is the TwentyFour Income Fund (LSE:TFIF). The stock is basically flat over the past year, but it boasts a high yield of 9.85%. The fund managers focus on buying asset-backed securities, such as loans for cars, mortgages, and other forms of consumer debt.
These securities pay a high coupon, given the risk of these loans is often higher than that of more traditional debt. However, the fact that the loans are collateralised by assets such as cars and houses means that even if someone defaults, it can help recover some of the loss. It holds 173 investments as of the latest company update, indicating a well-diversified portfolio.
As for dividends, the company pays out almost all of the profit it generates each year to shareholders. That means dividends are largely funded by real cash interest, not capital. That’s a key element in keeping it sustainable going forward. Further, the company has met or exceeded dividend targets every year since its launch in 2013! So, although past performance doesn’t guarantee future returns, the track record does speak for itself.
In terms of risks, the debt and bonds bought depend on consumer and corporate health. So if we get an economic downturn with higher unemployment or housing stress, it could quickly result in higher loan losses.
Even with that concern, I think it’s still a dividend stock with a high yield for investors to consider.
