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Is this the best dividend stock outside the FTSE 100?

When looking for dividend stocks, many investors tend to stick to the FTSE 100. That’s understandable, as the large-cap index is home to many high-yielding firms. Its average yield is currently 3.2% on a forward-looking basis.

However, what many investors don’t realise, is that the Footsie’s little brother, the FTSE 250, also contains a large number of dividend-paying stocks. Here’s a look at two of them that currently yield over 4%.

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Bellway

Housebuilder Bellway (LSE: BWY) has been an absolute cash cow over the last five years. Growth of the company’s dividend has been nothing short of phenomenal, with the payout rising from 20p to 122p per share, a compound annual growth rate (CAGR) of an incredible 44%. City analysts expect a payout of 136p per share this year, which equates to a yield of 4.1%. Is there more dividend movement to come?

Bellway certainly seems to be enjoying a purple patch right now. The company advised in a trading update this morning that “market conditions continue to be favourable and customer demand for new homes remains strong.” For the first half of the year, housing revenue is expected to rise at least 14% to approximately £1.3bn, with the average selling price increasing by 7.8% during the period, to a record £276,000.

This positive momentum leads me to believe that Bellway can keep rewarding shareholders with big dividend payouts in the near term. Dividend coverage is expected to be around 3.1 times this year, indicating that the housebuilder can comfortably afford it payout. The stock also looks quite cheap on a forward P/E of under eight.

On the bear side, investors should note that during economic downturns, housebuilders can struggle. It’s a highly cyclical business. This means dividends can dry up. Something to keep in mind, if you depend on your dividends for income.

Greene King

Another FTSE 250 stock paying a large dividend to its investors is pub owner Greene King (LSE: GNK). The shares are heavily out of favour right now and have fallen nearly 30% in a year. That’s pushed the yield up to over 6.5%. Worth buying for the big yield?

The hospitality industry is going through a tough patch at present, with conditions described as challenging. The UK consumer is spending more cautiously and there are cost pressures affecting the pub sector. Greene King’s like-for-like sales for the first 37 weeks of the year declined 1.4%.

Having said that, I can see the appeal in taking a long-term position in Greene King right now. For starters, a 6.5% yield looks very attractive in today’s low interest rate environment. And the company has increased its dividend every year since 1997. That’s an excellent track record. Furthermore, while profitability is muted right now, dividend coverage still looks very solid. Analysts expect earnings per share of around 64p for FY2018, resulting in coverage of 1.9 times last year’s payout.

Also, the valuation of the stock looks extremely cheap. On estimated FY2018 earnings, the forward P/E ratio is 7.9. The trading environment is tough right now, but with a yield of 6.5% on offer, you can buy now and get paid to wait for the turnaround.

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Edward Sheldon owns shares in Greene King. 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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