The FTSE 250 is not usually viewed as a place for income investors to buy shares. Mid-cap shares are often lauded for their capital growth potential, but not for their income investing potential.
That view, though, could be out of focus. Although the FTSE 250 may have a dividend yield of 3.1% versus 4.4% for the FTSE 100, the mid-cap index offers at least 50 shares that have dividend yields which are higher than the large-cap index.
As such, for investors who are seeking to generate an improving income return to overcome a rising, and inadequate, State Pension, the mid-cap index could be a good place to start.
Of course, one of the reasons for there being a wide range of FTSE 250 shares with relatively high yields is the performance of the index itself. It has experienced gains so far in 2019, but prior to that it endured a tough 2018. Investors still appear to be cautious about the outlook for the FTSE 250, since the majority of its income is generated from within the UK. This means that it is more exposed to the UK economy than the FTSE 100, and may have greater risk attached to it depending on how the Brexit process turns out.
This, though, presents long-term investors with an opportunity to buy high-quality stocks at lower prices. Certainly, the index could experience a period of volatility, but equally its performance over the long run may prove to be impressive. The index’s yield of 3.1% may sound relatively low while the FTSE 100 yields 130 basis points more than that figure. However, compared to its historic level, it is high. This indicates that now could be a good time to buy mid-cap shares.
While the FTSE 250 is a UK-focused index, its incumbents continue to have exposure to the global economy. For investors who are concerned about the risks posed by Brexit, it is possible to buy FTSE 250 shares which are less exposed to the UK than many of their peers. This could help investors to reduce risk, and could mean that they enjoy more stable returns depending on how the global economy performs over the next few years.
As ever, though, the FTSE 250 is likely to be a more volatile index than the FTSE 100. By their very nature, mid-cap shares usually have less diversity and greater risk than their larger peers. They may have riskier balance sheets and could be more dependent upon a smaller pool of customers or markets.
However, with the FTSE 250 having recorded an annualised total return of 9% over the last 20 years versus an annualised total return of 4% for the FTSE 100, mid-cap shares could offer a more favourable long-term outlook at the present time. As such, they could be worth buying in order to counter the rising State Pension age.
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