I bought these FTSE 250 shares for fat dividends!

Bearded man writing on notepad in front of computer

Recently, my wife and I went on a four-week buying spree, snapping up 10 cheap shares. This new mini-portfolio has got off to a solid start, registering a paper gain of around 6.6% in its early weeks. Eight of our 10 new stocks are showing gains — including these two FTSE 250 shares, which we bought for delicious dividends.

FTSE 250 share #1: Direct Line

Direct Line Insurance Group (LSE: DLG) is a household name, becoming a leading motor insurer since starting out in 1985. Nowadays, it also sells business, life, pet, and travel insurance under various brands, relying on its famous red-telephone logo.

But this FTSE 250 share has slumped this year, following new rules that prevent insurers from overcharging existing customers. At its 52-week high on 28 October 2021, Direct Line stock hit 318p. As I write, it stands more than £1 lower at 215.8p. Here’s how this share has performed over time:

Five days 1.7%
One month 11.4%
Six months -28.6%
2022 YTD -22.7%
One year -30.2%
Five years -44.0%

Though this stock has bounced back lately, it has lost over three-tenths of its value over one year and is close to halving over five years. But we invested in this FTSE 250 share after these steep falls, buying in at around £2 a share. And what drew us to invest in Direct Line was its fat dividends, which the group recently confirmed are safe (for now, at least).

At the present share price, this mid-cap stock trades on an earnings yield of 9.3% and offers a market-leading dividend yield of 10.5%. Thus, this cash yield is not fully covered by earnings, so it might be cut in future (perhaps in 2023/24). Nevertheless, I’m a great admirer of this £2.8bn company, so we intend to hang onto this quality business for the long term.

Dividend stock #2: ITV

Another FTSE 250 share we bought recently was ITV (LSE: ITV). ITV is the UK’s leading terrestrial commercial broadcaster, operating six TV channels. It is also a major producer of media content, which it sells worldwide. But this cheap share has also lost a big chunk of value in recent years.

At its 52-week high, the ITV share price briefly hit 127.19p on 12 November last year. As I write, it hovers around 69.6p, having almost halved (-45.3%) since then. Here’s how it’s performed over six time scales:

Five days -5.2%
One month 5.8%
Six months -41.0%
2022 YTD -37.2%
One year -41.2%
Five years -58.3%

Frankly, owning ITV shares has been an unpleasant experience for a long while, with the stock down over two-fifths in the past 12 months. Also, it has crashed by almost three-fifths over the last half-decade. Yikes.

However, I see potential for a turnaround (or takeover) at ITV. In the meantime, its shares look cheap to me. They offer an earnings yield of 16.8% and a bumper dividend yield of 7.2% a year. What’s more, this cash yield is covered more than 2.3 times by earnings, which is a decent margin of safety.

Finally, I expect these two FTSE 250 stocks to be fairly volatile in 2022/23, due to soaring inflation, rising interest rates and slowing economic growth. But I buy shares for the long term, so I’m not panicking just yet!

The post I bought these FTSE 250 shares for fat dividends! appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Direct Line Insurance Group and ITV shares. The Motley Fool UK has recommended ITV. 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.