Yesterday, I looked at which UK shares from the FTSE 100 I’d buy if I were looking to generate a passive income stream from my £20,000 ISA allowance. Today, I’m doing the same thing with stocks from the FTSE 250.
Same rules, different index
Once again, my loose ‘rules’ for separating the wheat from the chaff include avoiding companies offering the highest dividend yields. Buying these stocks for income can often be counterproductive (not to mention costly). Outsize payouts are usually indicative of a company in trouble.
What I’m looking for is a decent income stream, but not one so great that there’s a risk I’ll never receive it. This is why ‘dividend cover’ — the extent to which profits cover the payout — is something I always investigate before buying.
On top of this, I’m trying to find a good spread of companies across sectors. This kind of diversification is particularly important when focusing on FTSE 250 stocks. After all, they tend to be more focused on the UK market and derive less of their money from multiple overseas markets. And while all companies have a degree of cyclicality to their earnings, I’m on the hunt for those where they are relatively consistent.
Here, then, are five stocks I’d be happy to buy for income.
FTSE 250 stocks for passive income
A 2.9% yield isn’t the largest an investor can get in the FTSE 250. However, drinks firm Britvic‘s predictable earnings make this a go-to income pick for me. The re-opening of hospitality venues in a couple of months should provide a further boost. Like Britvic, ingredients supplier Tate & Lyle‘s 4% yield is solidly covered by profits too.
For diversification, I’ve long been attracted to Tritax Big Box REIT. In addition to the 3.7% yield, the company gives investors exposure to the ongoing growth in demand for warehouses from retailers. Pandemic or not, the growth of e-commerce looks unlikely to slow.
IT infrastructure services provider Computacenter is a great, albeit low-margin, business. Earnings have accelerated markedly over the last few years. Factor in a sharp rise in free cash flow and its 2.2% yield is about as secure as you can find.
The annual dividend from online trading platform provider IG Group hasn’t budged for a while now (43.2p per share). Even so, this still gives a chunky yield of 4.9% at the current share price. And if markets do calm down once lockdown is fully over and people return to work, IG’s attempts to scale its presence in the US market should still keep the money rolling in.
Is the risk involved in buying these individual FTSE 250 stocks worth it? I’d say so, particularly as they all bear hallmarks of quality businesses. We’re talking robust balance sheets, strong brands and/or consistently goods returns on capital employed. Moreover, all currently offer dividend yields above that of the index itself (1.75%).
Notwithstanding this, it’s important to remember that nothing stands still in the market. The stocks highlighted above could all encounter specific, unforeseeable issues that lead to their dividend policies being revised. The possibility of a third wave of coronavirus hitting these shores also needs to be borne in mind.
As such, I certainly wouldn’t dissuade anyone without the time, energy, or inclination to keep track of their investments from buying a FTSE 250 index tracking fund instead.
The post FTSE 250 shares: how I’d invest £20,000 for a passive income appeared first on The Motley Fool UK.
Paul Summers owns shares of IG Group Holdings. The Motley Fool UK has recommended Britvic and Tritax Big Box REIT. 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.
Motley Fool UK 2021