The FTSE 100 is often the main focus for investors looking for high-yield dividend stocks. That’s fair enough, as these large firms (usually) offer welcome stability.
But I think investors who ignore the mid-cap FTSE 250 run the risk of missing out on some high-quality businesses with attractive income potential. In this piece I’m going to highlight three of my top income picks from this sector of the market.
Profit from volatile markets
Diversification isn’t just about sectors, in my view. Another approach that can work well is to find companies that perform well when markets are volatile. One business that fits this description is online financial trading firm IG Group Holdings (LSE: IGG).
This business is still dealing with the impact of regulatory changes last year which restricted the amount of leverage available to retail traders. But IG is the biggest player in this sector and has identified a number of new opportunities for growth and expansion.
If these new opportunities pay off, then IG’s new chief executive June Felix believes revenue could rise by 30% by 2022. With the shares trading on less than 13 times earnings and offering a fairly safe 7.7% yield, I rate IGG stock as a buy and am happy to remain a shareholder.
A super shop operator
High street retailers have a bad name at the moment, and rightly so in some cases. But value greetings card retailer Card Factory (LSE: CARD) appears to be an exception to the rule.
By designing and producing its own stock, this group generates a return on capital employed of about 19% and plenty of surplus cash. Shareholders reap the rewards with generous dividends, which currently provide a well-supported 7.1% yield.
What could go wrong? Although Card Factory is benefiting from falling high street rents on its stores, I see the group’s continued expansion as a risk. Sales growth from existing stores was just 2.3% during the first quarter. If newer stores don’t perform as well, the extra costs could put a drag on profits.
Despite this, I’m impressed by this company’s track record and disciplined approach. I see this as a good way to invest in the high street.
Waste to wealth?
I have to admit that the risk that a Labour government might nationalise UK utilities makes me a little nervous. I remain invested in one major utility stock, but I’m not buying more.
However, if I didn’t own any utilities, I’d probably consider buying Pennon Group (LSE: PNN). This group has two main parts – South West Water and the Viridor waste management business. These two operations complement each other well, in my view. While water is more profitable at the moment, growth is pretty much non-existent.
In contrast, waste has lower profit margins but is delivering much stronger growth. Waste revenue rose by 8% last year, while profits from waste rose by 19%.
Pennon’s interest in waste should lessen the impact if water utilities are nationalised. And if they’re not, then I’m fairly confident the growing waste business will continue to support inflation-beating dividend growth.
PNN shares currently trade on a forecast P/E of 13 and offer a 5.9% yield for 2019. In my view that’s a fair price. I’d be happy to buy at this level.
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Roland Head owns shares of IG Group Holdings. The Motley Fool UK owns shares of Card Factory. 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.