While investing in FTSE 250 dividend shares carries greater risks than having a Cash ISA, doing so could certainly lead to higher returns in the long run. Cash ISAs generally offer income returns that are 1.5% at best, which is below the rate of inflation. However, within the FTSE 250 it’s possible to generate a significantly higher income return, as well as benefit from above-inflation growth in dividends.
With that in mind, here are two mid-cap stocks that appear to offer a potent mix of a relatively appealing income return, as well as the potential for capital growth over the long run.
Designer, manufacturer and retailer of miniature wargaming products, Games Workshop (LSE: GAW), released an encouraging trading update on Friday. The company has seen the momentum in the earlier part of 2019 continue through into the last couple of months. This means sales for the 2019 financial year are expected to hit £254m, with profit before tax due to be at least £80m.
During the 2019 financial year, which ended 2 June, the company paid a dividend of 155p per share, that’s an increase of 23% on fiscal 2018. It means the company yielded 3.3%.
Since it has an ongoing policy of distributing surplus cash to shareholders when available, its continued strong performance suggests further improvements to its dividend payments may be ahead over the long run.
With Games Workshop having a strong position within what remains a fast-growing market, it could generate impressive returns over the coming years. Although further pressure on consumer confidence may affect its performance in the near term, it could deliver a rising dividend in the long run.
While the housebuilding sector has been highly unpopular among investors in the last few years, the performance of Redrow (LSE: RDW) has been impressive. The FTSE 250-listed housebuilder has posted double-digit earnings growth in each of the last five years, which suggests its business model is sound.
Looking ahead, demand for new homes is expected to remain high. A supply shortage, the wide availability of finance through mortgages, and the government’s Help to Buy scheme could mean the sector is set for a period of further growth.
Certainly, there are a variety of political and economic risks ahead. But with Redrow trading on a price-to-earnings (P/E) ratio of 6.2, it appears to offer a wide margin of safety. Furthermore, its dividend yield of 5.3% is covered three times by profit, which also suggests it’s highly sustainable.
Although the housebuilding sector may remain unpopular among investors over the short run, in the long term companies such as Redrow could offer high income returns and the prospect of significant capital growth. As such, I think now could be a good time to buy a slice of the business.
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Peter Stephens owns shares of Redrow. The Motley Fool UK has recommended Redrow. 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.