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The FTSE 250 is crashing, and I think these dividend stocks are bargains

The FTSE 250, containing so many of the UK’s up-and-coming mid-cap companies, has nicely outperformed the FTSE 100 over five years with a gain of 22%, while it’s bigger sibling has only managed 7%. The FTSE 100, though, has been ahead on dividend yields.

I’ve been wondering recently whether that trend is set to reverse. So far in 2018, we’ve seen the FTSE 250 losing 10%, while the FTSE 100 has fallen slightly less, with a drop of 8%.

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But rather than pontificate on which index is likely to do better in the future, and whether smaller stocks will fall back from their recent outperformance, I’m doing what I think we all should when a stock market is falling. I’m looking for bargains, specifically stocks with dividends that just got better.

Oversold

I have to start with Bovis Homes, as I really think the market has got it wrong in its bearish take on house-builders.

My colleague Royston Wild says he would be “happy to buy it now and hold it long into the future,” based on its forecast dividend of nearly 11%, and low P/E of under 10. I agree, but I’d also caution that its big dividend is not covered by earnings, and includes a significant chunk of special dividend, as the company redistributes excess capital to shareholders.

But the firm’s figures bear no relation to the share price fall, with an expectations-busting 41% rise in pre-tax profit for the first half of the year.

Cyclical

I’ve liked hedge fund manager Man Group for some time. It provides easy access to that sector for private shareholders, though I don’t think you should buy it if you can’t handle erratic year-on-year earnings, and a bit of share price volatility.

But a roller-coaster share price does often provide tempting dividend prospects when it’s on one of its down cycles, and that’s how I see Man at the moment. After a 28% price fall so far in 2018, the forecast dividend looks set to yield better than 6%. I definitely think you need a long-term outlook, though, if you’re thinking of going for this one.

Oil services

Oil and gas services firm Petrofac suffered during the big oil slump, and its shares have gone into decline again since the price of a barrel has started to dip once more. We also have a couple of years of modest earnings falls forecast for this year and next, and I can understand why investors are steering clear.

But the shares are on a forward P/E of just six now, and there’s a 6% dividend on the cards, which would be covered around 2.5 times by earnings. I see Petrofac shares as undervalued.

I also like the look of big dividends from New River REIT, a commercial real-estate investment trust, which also enjoys EPS growth forecasts.

Pennon Group, the waste management and recycling firm and owner of South West Water, is another of my mid-cap favourites. On a P/E that’s close to the market average at 14, Pennon shares offer forecast dividend yields of 5.5% this year, and 5.9% next. And Tuesday’s first-half results look good to me.

The FTSE 250? Bag of bargains, I reckon.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. 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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