The FTSE 250 is packed with mature, cash-rich companies that have a great record of delivering passive income. I myself own several dividend shares here that offer above-average yields and/or the prospect of strong dividend growth.
But investors need to be extra cautious today when buying shares on London’s second-tier equity index. The FTSE 250 is more focussed on the UK than the FTSE 100. So as the domestic economy slows, the growth and dividend forecasts of many top stocks are looking very shaky.
“Recession-like conditions”
The huge stress on UK shares is illustrated by profit warning data from EY-Parthenon today.
There were a mammoth 75 profit warnings issued during Q1, the highest first-quarter total since 2020. This was also the fifth consecutive quarter of above-average profit warnings.
The outlook for the British economy has improved since the beginning of 2023. Indeed, EY Club now expects GDP to rise 0.2% this year, up from a previously forecast 0.7% decline.
Yet as Jo Robinson, EY-Parthenon partner, comments: “The first quarter gave us several reminders that this recovery won’t be linear or straightforward.” She added: “The extraordinary strength of headwinds faced by UK businesses in the last two years has meant parts of the economy have felt recession-like conditions and issued recession-like levels of profit warnings, even as the economy grew.”
Looking on the bright side
Rising interest rates and high inflation continue to pose a threat. These will keep the strain on consumer spending and push firms’ financing costs higher.
This is why investing in ‘safe-haven’ FTSE 250 shares could be a good idea. I’m talking about pharmaceutical manufacturers, defence companies and utilities suppliers, to cite just a few examples. Their operations and profits tend to be stable at all points of the economic cycle.
And right now many of these rock-solid companies offer gigantic dividend yields.
7%+ dividend yields!
Target Healthcare REIT is one such stock I actually own. This company operates a large network of care homes, demand for which is growing as Britain’s elderly population rapidly expands. And it’s a good stock to own in difficult times as the rent it charges continues to stream in.
This dividend share yields an impressive 8.8% for this financial year. I believe it’s a top buy despite the threat of nursing staff shortages to its operations.
NextEnergy Solar Fund — which carries a 7.7% dividend yield — is another FTSE 250 share I’m considering buying today. Electricity demand remains broadly constant at all stages of the economic cycle. This means that in the absence of long periods of adverse weather, earnings at renewable energy stocks like this also remain robust.
I’m also looking at adding Supermarket Income REIT to my shares portfolio. Okay, rising costs are a problem for UK retailers. Yet food retail still remains one of the most stable industries out there, creating resolute rental income at this grocery property stock.
This is why City analysts expect the business to keep paying above-average dividends. The yield here sits at a brilliant 7.1%.
