The FTSE 100 is a safe bet when it comes to picking shares, but it seldom offers the best yields. To add a bit of ‘oomph’ to a passive income portfolio, it pays to dig a bit deeper.
Today, I’ve uncovered two mid-cap shares on the UK’s smaller indexes that could provide lucrative dividend returns.
But I’m not just going on the yield — both these shares have impressive return on equity (ROE) and a price-to-earnings growth (PEG) ratio below one. This shows they use their equity efficiently and are well-priced relative to earnings growth.
Let’s dive in.
Polar Capital
Polar Capital (LSE: POLR) seems like a small outfit on the face of things, with a market cap of only £400m. But it’s a major London-based fund manager with upward of £23bn in assets under management (AUM). Not only that, its AUM has grown almost 10% in the past year — during a period when many fund managers have experienced reduced AUM.
One risk is that the fund is largely focused on healthcare and technology, much of which derives revenue from the US. With new trade tariffs in place, these stocks may suffer, passing on losses to Polar Capital.
Price performance might not look that great at first; it’s up less than 10% in the past five years. But when adjusted for dividends, the full return on investment (ROI) rises to 57.23%. That equates to an annualised return of 9.86% per year — not bad!
Of course, there’s no guarantee that performance will continue. But annual dividends have increased 80% in the past 10 years, which is promising. Currently a meaty 11.4%, its dividend yield typically fluctuates between 7% and 15%.
Twenty-Four Income Fund
Twenty Four Income Fund (LSE: TFIF) is a relatively young investment company established in 2013 in Guernsey.
Its focus is on European asset-backed securities (ABS) with low liquidity and high yields. This strategy gives investors exposure to a segment of the fixed-income market that is often overlooked yet potentially valuable.
Consequently, the fund maintains a high and stable yield between 9% and 10%. Over the past decade, its final dividend has grown from 6.38p to 9.96p at a rate of 3.4% per year.
However, the focus on asset-backed securities (ABS) and mortgage-backed securities (MBS) also adds a moderate level of risk. Not only can they lack liquidity, but they are also sensitive to the quality of the underlying loans. If borrowers default, the fund’s income and capital could be affected. Reduced income can lead to dividend cuts.
As is common with dividend-focused funds, the share price has enjoyed only moderate growth of 30% in the past five years. However, total returns reach almost 87% when adjusted for dividends, equating to annualised returns of 13.3% per year.
While both the above stocks have experienced historical losses due to market downturns, I think they are worth considering for the high and reliable dividends. For investors looking to build a steady passive income stream, a reliable dividend history with consistent growth is a key element to look for.
