A FTSE 250 dividend stock I’d buy for my ISA today after 20% jump

I think top dividend shares from the faster-growing FTSE 250 (INDEXFTSE: MCX) could boost your Stocks and Shares ISA.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In these days of economic gloom, high street struggles, and regular profit warnings, it cheers me to hear a company telling us it’s doing better than expected.

That’s what’s just happened at Dunelm Group (LSE: DNLM), whose shares perked up 20% Thursday morning.

In an update, the FTSE 250 homewares retailer said it has “successfully transitioned all of our customers to our new digital platform,” adding that “during this critical transition period we did not see any adverse impact to our performance, maintaining our strong sales growth both online and in stores.”

Election concern

With gross margins better than expected, the firm now says full-year pre-tax profit should come in ahead of previous expectations — providing there’s no upset from the general election. I doubt Jeremy Corbyn intends to nationalise the soft furnishings business just yet, though the election could have an adverse impact on quite a few other sectors.

But I don’t think there’s anything for shareholders to worry about, and I’m seeing an attractive long-term income buy here. At full-year time at 29 June, Dunelm spoke of excellent cash flow generation and confirmed a special dividend of 32p on top of an ordinary 28p dividend, and that bodes well for future payments.

The forecast ordinary dividend for June 2020 would yield 3%, even after Thursday’s share price rise, and would be 7.5% ahead of this year’s. Coming on top of several years of strongly progressive rises, I reckon Dunelm has what it takes to keep its dividends growing nicely ahead of inflation.

Best index

What else would I buy for my Stocks and Shares ISA? I’ve traditionally thought of high-dividend FTSE 100 stocks as the best long-term choice, but there’s a strong argument for including some FTSE 250 picks too. Being composed of smaller companies, the FTSE 250 is generally associated with significantly higher risk than the FTSE 100.

And that sort of makes sense when we consider that we hear of far more smaller companies going bust than FTSE 100 giants. But against that, a struggling top tier company is likely to fall down the ranks of the mid-cap index before finally hitting the skids, so that’s probably a little misleading — though smaller firms on the way up are more likely to hit trouble before they make it big.

When we compare the two indexes, the outperformance of the smaller one is quite remarkable. Over the past five years, while London’s top index has gained 9.2%, the 250 has trebled that performance with a 29% gain. And over 10 years, it’s won hands down with a 131% gain compared to the 100’s relatively meagre 38% advance.

Volatile

That almost makes it sound like a no-brainer, but there is a downside in the shape of volatility. When markets are struggling, the FTSE 250 almost always falls more sharply. So if we’re in for the post-Brexit slowdown that most economists expect, the FTSE 100 could be more resilient as a defensive investment.

But the thing with a Stocks and Shares ISA, at least as far as I’m concerned, is that it’s best used for seriously long-term investing — by which I mean more than a decade. And over those timescales, I reckon a handful of FTSE 250 shares would make a great ISA addition.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »