The average dividend yield on the FTSE 250 is 3.2%, slightly below the FTSE 100. However, I like the higher growth potential in smaller-cap stocks.
The highest-yielding stocks are Ithaca Energy at 16.5%, and Diversified Energy Company (DEC), at 14.61%. But Ithaca has only paid dividends for a year and DEC recently announced a dividend cut from next year that brings the yield down to 7.2%.
Earlier this year, my Vodafone shares fell sharply and dividends were cut. Not only was I down on the share price but I no longer had the dividends to make up the deficit. So I offloaded them at a loss and promised myself I wouldn’t make that mistake again!
High yields can be misleadingly attractive. So now I like to look for more concrete evidence of long-term reliability.
These two stocks satisfy my criteria in that respect.
Greencoat UK Wind
Oil remains the fuel of choice today but the winds of change are blowing and renewable energy is making powerful strides forward. Greencoat UK Wind (LSE: UKW) is at the forefront of wind power generation, having just received a powerful boost from the new Labour government.
With onshore wind farm construction now given the green light, the firm forecasts a significant increase in market opportunities. It’s paid a consistently increasing dividend since 2013 and currently has a yield of 7.4%. The price, at 143p, is up 8.7% this month, having traded between 130p and 150p for the past year.
But nature is a fickle beast and wind is unreliable. Calm weather combined with an electrical fault at a major site resulted in lower earnings this year. With free cash flow falling from £204m to £165m, dividend coverage dropped by 25%. So far, payments have been reliable but that does add an element of risk.
Still, I trust in its future so I plan to buy the shares as soon as they become available on my broker platform.
Primary Health Properties
Primary Health Properties (LSE: PHP) is a real estate investment trust (REIT) that invests in health facilities.
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It’s been paying dividends for over 20 years, increasing from 1.7p to 6.7p at a rate of 3.25% per year. Over the past five years, the yield has increased from 4% to 7.4%. That would be good, had the share price not dropped 28% in the same period.
Fortunately, things look to be turning around. Over the past year, it traded mostly flat as inflation settled — and it has a history of growth, increasing 533% between 2000 and 2020. If things improve as they did after 2008, I expect another decade of growth.
However, if stubborn interest rates stifle the housing market, the REIT could suffer further losses. It already carries £1.34bn in debt, only slightly less than its equity. That puts it in a precarious position if earnings don’t improve.
Once again, I believe they will, so I recently bought the shares.
Other great income options
It’s best to have a diversified portfolio of stocks to shield against sudden and unpredictable market mishaps. Even the most reliable companies have bad days!
A few other FTSE 250 income stocks that I’ve added to my portfolio recently include TP ICAP and ITV. They both have yields between 6% and 7% and their prospects look good to me.
This post was originally published on Motley Fool
