With 7% yields and low payout ratios, these FTSE 250 dividend shares could be hard to ignore
When searching for dividend stocks on the FTSE 250, I always make sure to check both the payout ratio and the year-on-year growth. These important metrics tell me two things: how well payments are covered and the rate at which dividends increase.
Ideally, the company should have a low payout ratio (below 50%) and decent annual dividend growth (at least 5%). This indicates it’s dedicated to ensuring shareholder returns remain consistent and uninterrupted.
When building a long-term passive income portfolio, it’s critical that dividend returns are regular and reliable. In addition to the payout ratio, it’s important to ensure the company has a solid balance sheet with notable earnings growth and sustainable debt levels.
Using these criteria, I’ve identified two promising candidates on the FTSE 250 that dividend investors might want to consider for an income-focused portfolio.
OSB Group
OSB Group‘s (LSE: OSB) a UK-based specialist mortgage lender, primarily serving the buy-to-let and residential sectors through its subsidiaries. Formed from the 2019 merger of OneSavings Bank and Charter Court Financial Services, the bank focuses on professional landlords and complex underwriting.
As a challenger bank, it faces stiff competition from larger rivals in the mortgage industry, which could threaten its market share. Plus, rising funding costs in a subdued housing market put it at risk of losses from defaulters.
Yet it remains dedicated to shareholders. Since Covid, dividends have grown rapidly from 4.9p per share to 33.6p. Reassuringly, they’re well-covered by earnings, with a payout ratio of only 43.3% and supported by strong financials.
Last year, underlying pre-tax profit came in at £442.9m, a 4% increase from 2023. Operating income grew modestly to £418.1m from £374.3m, while earnings per share (EPS) improved to 78p from 66p.
Investec
Investec‘s (LSE: INVP) a dual-listed financial services company operating in the UK and South Africa, offering a range of services including private banking, wealth management and corporate and investment banking. The group’s recently focused on streamlining operations and enhancing capital efficiency.
It’s exposed to volatile economic conditions in both the UK and South Africa, including potential credit impairments and regulatory challenges. Notably, the company recently set aside £30m in provisions related to an industry-wide investigation into motor finance commission practices.
Like OSB, dividends have increased quickly since the pandemic, rising from 11p per share to 34.5. Prior to that, it enjoyed 10 years of solid dividend growth, supported by a low payout ratio of 49%.
The bank’s set to release its 2024 full-year results Wednesday (22 May). A pre-close trading update suggests a potential 12% increase in operating profit and a slight drop in earnings per share (EPS). Last year, it saw a 9.1% increase in full-year profits, with revenue rising 5% to £2.1bn. Most notably, its cost-to-income (C/I) ratio improved to 57%, reflecting the ongoing efficiency measures.
Prioritising long-term income
For investors seeking income without compromising on quality, I think these two FTSE 250 dividend stocks offer an attractive proposition. Their combination of high yields, low payout ratios and resilient business models could make them excellent additions to consider for a passive income portfolio.
When aiming for generational wealth, a long-term mindset cannot be overstated. This is particularly pertinent in a high-interest rate environment, where regular income remains a top priority for the market.
The post With 7% yields and low payout ratios, these FTSE 250 dividend shares could be hard to ignore appeared first on The Motley Fool UK.
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Mark Hartley has positions in OSB Group. 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.
