For income investors looking for high-yielding dividend shares, the FTSE 250 can be a useful hunting ground. Being more established than speculative penny stocks, these companies are more likely to be profitable and cash-generative. Plus, they’re often cheaper and have lower overheads than blue-chips, so many can offer punchier yields.
Because they’re smaller, they often use generous payouts to attract new investors and support their share prices. That can work well, but it also raises the risk of a dividend cut if profits or cash flow fall short. So it’s critical to check the company’s track record and how well the dividend is covered.
Three names that caught my eye recently are MONY Group, B&M European Retail (LSE: BME) and Aberdeen Group. Between them, their average yield comes in at around 7.5%, more than double the FTSE 250’s overall average. That could give a serious boost to an income-focused portfolio.
Here’s why I think they’re good picks to consider.
Highest yield, stretched coverage
Offering the highest yield of the three at 7.8%, MONY Group’s supported by a 19-year payment record. Its earnings cover the dividend by 82.4%, which is tighter than I’d like but still adequate, in my view.
Cash coverage of 1.7 times tells me the business is turning enough profit into cash to fund the payout, though there isn’t a huge margin for error. The main risk here is a downturn in trading or rising costs squeezing that cushion and forcing management to reset expectations.
Moderate yield, strong coverage
B&M European Retail brings a 7.5% yield to the table, backed by 11 years of dividends. That’s shorter than MONY’s history, but still a decent track record for a retailer.
Payouts only make up 53.2% of earnings, which is excellent, and is further backed by cash coverage of 2.1 times.
What’s particularly attractive about BME right now is the low valuation. With a price-to-earnings (P/E) ratio of only 7 and a price-to-sales (P/S) ratio of 0.32, it looks very cheap. That adds significant price growth potential to the mix.
The obvious risk is the consumer backdrop: if inflation picks up again or real wages come under pressure, shoppers may rein in spending and hurt profits. Retail is also highly competitive, so any misstep on pricing or stock could dent performance.
Lower yield, best track record
Aberdeen Group has the lowest yield of the trio, at 7.3%, but it combines that with excellent safety indicators. It boasts a 20-year payment history, with earnings coverage of 67.4% and cash coverage of 2.3 times.
That mix of longevity and strong cash support makes the payout look highly reliable. But asset managers can be sensitive to market swings and investor sentiment. A sharp fall in markets, or sustained outflows from its funds, could still threaten future payments.
Final thoughts
For investors targeting sustainable income, this 7.5%-yielding mini-basket is an example of how to identify promising mid-cap stocks. On balance, I think all three shares offer attractive income potential, with different trade-offs between yield and safety.
As always, it’s best to spread investments across various sectors to avoid relying on any single dividend. I’m also interested in a few FTSE 100 shares that could add a level of defensiveness.
