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Retirement saving: why I’d buy FTSE 250 dividend stocks for my Stocks and Shares ISA today

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While many people seeking to save for retirement focus on the FTSE 100, the FTSE 250 could also offer significant income potential. Although the yield of the FTSE 250 may be around 3% versus around 4% for the FTSE 100, there are a wide range of mid-cap shares with high yields at the present time.

Furthermore, the FTSE 250 could offer superior growth prospects than the FTSE 100. Over the long run, this could lead to an improved financial outlook for retirees.

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FTSE 250 dividend stocks

While the FTSE 250 may not appear to offer a high income return, at present there are 75 mid-cap stocks that yield over 4%. Although not all of them may be worth buying right now, and other factors such as dividend affordability are central to an investment decision, there seems to be a wide range of choice for income-seeking investors.

In fact, it’s quite possible an investor could build an entire income portfolio from FTSE 250 dividend stocks. This would be likely to leave them with an average dividend yield across their portfolio of more than 4%, which could provide a generous retirement income in older age.

While it may be possible to generate a higher yield from FTSE 100 shares, the difference between mid-cap shares and large-cap shares when it comes to income returns may not be as large as many investors currently believe. As such, focusing on mid-cap stocks could be a worthwhile move when seeking to earn a passive or second income from a portfolio.

Growth potential

When it comes to growth potential, the FTSE 250 has a much better track record than the FTSE 100. In the last two decades, the mid-cap index has recorded an annualised capital return of around 6%, while the figure for the FTSE 100 is around 1%.

Certainly, the FTSE 100’s higher yield makes its total return of 4.5% more palatable, but this is around half the total return delivered by the FTSE 250 over the same time period.

Therefore, it may be beneficial for an investor who hasn’t yet retired to focus on the FTSE 250, simply because it could help them to build a larger nest egg by the time they do. This could allow them to generate a higher income from their portfolio in older age.

Risks

While the FTSE 250 may offer higher return prospects than the FTSE 100, its risks could be greater. It’s less internationally focused than the FTSE 100, which could mean it suffers to a greater extent from Brexit-related difficulties in the near term.

However, it may also offer better value for money, since many of its members may be trading on wide margins of safety as investors plan for a challenging outlook for the UK economy. As such, now could be a good time to buy FTSE 250 stocks, with their risk/reward ratios relatively appealing.

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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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