As an old-school value and income investor, I’m always seeking undervalued and high-yielding shares. Many current holdings come from the FTSE 100, but I also own several FTSE 250 stocks for dividend income.
However, of the five FTSE 250 companies in my family portfolio, one was taken over in March. This produced a healthy capital gain that will be reinvested. Also, another mid-cap holding is being bought by a rival. Again, this acquisition will deliver more cash to invest in good businesses at fair prices.
Big dividends can be risky
One major issue with dividend investing is that future cash payouts are not guaranteed. Thus, they can be cut or cancelled at short notice. Indeed, when businesses get into trouble and need to preserve cash, dividends (and share buybacks) can be first in the firing line.
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Another problem is that ultra-high cash yields can be an indicator of future stresses. Experience has taught me that, say, double-digit dividend yields often don’t last. Instead, either share prices rise or dividend payouts get sliced, both of which reduce future yields.
An industry under stress?
Earlier, I ran a filter on the FTSE 250, looking for its very highest dividend yields. During my search, I noticed several asset-management groups near the top of my table. For example, take this trio of asset managers, whose shares offer dividend yields ranging from almost 8% to over 13% a year. My table is sorted from highest to lowest cash yield:
| Company | Share price | Market value | Dividend yield | Dividend cover | One year | Five years |
| Ashmore Group | 128.9p | £918.7m | 13.1% | 0.6 | -29.6% | -65.2% |
| aberdeen group | 138.4p | £2.6bn | 10.6% | 0.9 | +1.2% | -32.3% |
| Jupiter Fund Management | 69.3p | £372.2m | 7.8% | 2.3 | -14.2% | -66.5% |
One problem immediately jumps out at me from this table. Currently, two of these shares don’t generate enough earnings to meet their dividend payouts. Therefore, these firms may have to dip into their cash reserves to maintain their cash payments at such elevated levels.
For me, dividend cover below one is a warning sign to stay away from certain high-yielding shares. Hence, I can’t see myself investing in the first two businesses listed above because I don’t think their yields will last.
Drops of Jupiter?
However, I’m intrigued by the shares of Jupiter Fund Management (LSE: JUP). At their 52-week high, they touched 91.3p on 29 July 2024. However, this stock has tumbled southwards since then, hitting a one-year low of 64.7p on 7 April.
On 17 April, Jupiter shares closed at 69.3p, valuing this once-vaunted group at under £375m. Steep price falls have pushed up this stock’s cash yield to 7.8% a year — more than twice the Footsie‘s yearly dividend yield of around 3.5%.
What interests me about this stock is that its yield is covered 2.3 times by trailing earnings. To me, this is a very healthy margin of safety, indicating that payouts may continue at these levels — or even rise. However, with UK asset management under relentless pressure from low-cost index funds and exchange-traded funds, Jupiter’s future earnings could fall.
In summary, Jupiter may be a ‘fallen angel’ — a good company fallen on hard times, with a depressed share price. I’m considering it so I shall ask my wife whether she agrees this FTSE 250 share deserves to join our family portfolio!
