2 FTSE 250 dividend stocks I’d buy to beat the FTSE 100

Roland Head explains why he believes these FTSE 250 (INDEXFTSE:MCX) mid-cap stocks could beat the FTSE 100 (INDEXFTSE:UKX).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You can have it good, fast or cheap — but you can only pick two.

This old project management saying can equally be applied to investment. If you’re looking for good quality stocks with the potential to deliver steady gains, you probably won’t get them cheap.

Today, I’m looking at two stocks I think have the quality needed to make them profitable buys, despite both having risen by more than 30% over the last year.

This triple bagger could hit the spot

Financial firm Jardine Lloyd Thompson Group (LSE: JLT) may not be a name you’re familiar with. But this FTSE 250 speciality insurance and employee benefits provider has tripled in value since November 2009, while also delivering dividend growth of 65%.

2017 was another year of good progress. The group’s revenue rose by 10% to £1,386m, while underlying pre-tax profit rose 11% to £191.5m. Underlying earnings rose by 14% to 58.5p per share, in line with analysts’ forecasts.

The total dividend for the year was lifted by 5.6% to 34p per share, giving a trailing yield of 2.6% at the last-seen share price of 1,330p.

High margins = high returns

Groups with multiple businesses sometimes depend on one division for most of their profits. That’s not the case here.

Jardine’s insurance businesses delivered an underlying trading profit of £197.9m last year, at a trading margin of 19%. The group’s employee benefits division delivered £50.1m of underlying trading profit, at a margin of 16%.

Although the amounts vary, profit margins across the group’s businesses are fairly high and quite closely matched. This suggests to me that all parts of the business are pulling their weight.

These shares now trade on a 2018 forecast P/E of 19 with a prospective yield of 2.6%. In my view this could be an attractive opportunity if you’re looking for a buy-and-forget dividend stock.

A class-leading performer

Another financial stock I like is IG Group Holdings (LSE: IGG). This FTSE 250 firm is the UK’s largest and oldest CFD trading firm. IG allows investors to trade Contracts for Difference and place spread bets on a wide range of securities and markets.

This has always been a very profitable business. Over the last five years, the group’s operating margin has averaged 43% and its return on capital employed has averaged 32%. The dividend has risen by an average of 7% per year, supported by very strong cash generation.

The risk is that profits could be hit by proposed new regulations which will limit the amount of leverage available to retail customers trading CFDs. This could mean that trading levels are much lower than at present, reducing the revenue earned by companies such as IG.

London-based IG hopes that diversifying overseas and focusing on high value professional investors — who are expected to be unaffected by the new rules — will protect its profits.

The group’s shares have performed strongly over the last year, as investors have accepted the company’s view that any hit on profits will be limited. Earnings per share are expected to fall by 7% in 2018/19, leaving the stock on a forecast P/E of 15.7 with a prospective dividend yield of 4.7%. In my view this could be a good entry point for long-term investors.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of Jardine Lloyd Thompson. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »