Many investors look to the stock market as a way of generating additional income through dividends, and the FTSE 250 looks to be a great place to find elevated yields.
One of my primary passive investment strategies involves finding good quality companies that offer a high dividend yield. This can act as a great form of diversification within a portfolio, as a steady stream of additional income can help to offset short-term share price falls.
I have found that the UK’s second largest index, the FTSE 250, is often a good source of high dividend-yielding companies. Although, this yield alone is often not enough to warrant adding a share to my portfolio.
The first company on my list is abrdn. The company provides a variety of investment services, primarily global asset management. It has had a difficult time in the last few years, falling 42.9% in 2022. Furthermore, the share is down almost 60% from pre-pandemic levels.
From an income perspective, the most appealing aspect of this share is the 10.6% dividend yield. This far exceeds the current index average of 3.3%, and is very tempting on the surface. The company has also paid a dividend consistently for 16 years, which is another good sign.
However, this is not the full story, as the company has struggled with earnings over the last few years. Headline earnings and cash generation have fallen considerably. This has consequently impacted its dividend-paying ability, with a dividend cover of just 0.6, meaning that it will struggle to pay dividend at this current level.
As a result, I would not currently consider adding abrdn to my portfolio, despite the attractive dividend yield.
Royal Mail Group
The second company on my list is Royal Mail Group, arguably one of the most well-known publicly listed companies in the UK. Its main business sectors are UK postal and delivery services, along with non-UK equivalents. Despite a very strong 2020 and 2021, the company has suffered in the last year, down 61.2%.
As with the previous example, the company offers a very enticing dividend, with a yield of 10.2%. This level once again is far in excess of the index average, and the yield is forecast to increase by over 8% in the next year.
Unfortunately, on further inspection, this may not be as good of an opportunity as it seems. The company has experienced declining profitability, and debt levels have soared. Despite the history of consistent dividend payments, these underlying fundamentals are not encouraging.
For that reason, I would also not be tempted to add Royal Mail Group to my portfolio as an income-generating share.
The final share on my list is Ashmore Group, an asset management company focusing on emerging market assets. The company has fallen 27.1% in 2022, marking three years of poor share price performance.
The dividend of 8% is not the most extreme on the list, but still comfortably in excess of the FTSE 250 average. I am encouraged by the company’s track record, consistently paying dividends over 16 years. However, it too has struggled with earning declines, and dividend affordability may start to come into question.
Although Ashmore Group is probably the most tempting of the three to add to my portfolio, I am still not persuaded due to the underlying fundamentals.
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- Director dealing: abrdn, Vistry Group, Alpha FX
Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.