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

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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.

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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.

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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.

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