If an investor bought the highest-yielding FTSE 250 stocks, here’s the passive income potential

Dividend yields change each day, with the fluctuating share price impacting performance. Yet when I consider the current options offering the juiciest returns, the passive income that can be made is quite significant.

There are risks involved, but if an investor targeted just the stocks with the most significant yield, here’s what the portfolio could look like.

Balancing risk and reward

I’m going to filter for options just in the FTSE 250. For reference, the average index yield’s 3.49%. Foresight Environmental Infrastructure (LSE:FGEN) has the highest yield at 11.58%. Yet I doubt anyone would put all their money in just one idea. Rather, to benefit from diversification, it makes sense to include at least the top half dozen companies.

We’re already dealing with stocks with a higher risk than normal, given the elevated yields. Holding several shares means that if the yield on one share gets cut, the overall impact on the portfolio can be managed.

With that in mind, a portfolio could include not just Foresight but also the SDCL Efficiency Income Trust, the Foresight Solar Fund, the Bluefield Solar Income Fund, Energean and Harbour Energy. The average yield from this group of top income shares would be 10.71%!

Therefore, let’s say an investor put Â£100 a month in each of these stocks for five years. In year six, without any further capital inflows, they could make Â£483 a month just from the dividend payments.

Digging a little deeper

Let’s run through Foresight Environmental Infrastructure in a little more detail. Its mandate is to build a diversified portfolio of environmental infrastructure assets (hence the name) that offer long-term, inflation-linked cash flows. As a result, the goal is to provide shareholders with a sustainable, progressive dividend. At the same time, it tries to preserve capital in real terms over the long run.

Despite this aim, the yield in excess of 11% is still high. One factor is due to the 22% share price fall in the past year. There’s no one single factor for this, but rather several worth flagging. For example, lower power prices and volatility in energy markets have put pressure on revenue. Added to this is a number of portfolio assets that have underperformed expectations recently.

However, I don’t see an immediate threat to the dividend. Earlier this summer, the board reaffirmed its commitment to the dividend as it looks to simplify the current portfolio and wind down assets that are less aligned with its stable cash flow focus. I think this is a wise move and should help both the share price and the dividend in the long run.

It’s true that there are risks. The recent asset issues (maintenance cost overruns, underperformance of wind and some outages) show the vulnerability of revenue to physical and weather risks.

Yet if investors can diversify single-stock risk by holding other high-yielding stocks, it can be a strategy worth considering.

The post If an investor bought the highest-yielding FTSE 250 stocks, here’s the passive income potential appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Foresight Solar Fund. 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.