How much passive income does the FTSE 250 offer?
In theory, the FTSE 250 should offer a lower dividend yield than the FTSE 100. That’s because it has traditionally been viewed as more growth-oriented, with lots of mid-cap firms still in their expansion phase.
By contrast, the FTSE 100 is dominated by large companies like Shell, BP, HSBC, GSK, and British American Tobacco. As these are very mature, they return a lot of cash to shareholders in the form of dividends.
In the last few years however, UK mid-caps have been less popular with global investors due to the stagnant domestic economy. And when a share price falls but the dividend stays the same, the yield goes up. Â
Meanwhile, the FTSE 100’s come back into fashion as investors have sought out established dividend payers with global operations. The index is now up around 65% in five years, with dividends on top.
The FTSE 250? Less than 35% with dividends!
Index tracker
As a result of these trends, the FTSE 250âs yield of around 3.3% today is higher than the FTSE 100âs 2.9%.
What this means is that someone could invest £10,000 in a tracker fund like iShares FTSE 250 UCITS ETF to aim for roughly £330 in yearly dividends.
This ETF simply tracks the mid-cap index, and the top five holdings are IG Group, Tritax Big Box REIT, housebuilder Taylor Wimpey, Johnson Matthey, and asset manager Aberdeen.
Picking individual shares
Alternatively, an investor could aim for higher passive income by picking individual mid-cap shares. While riskier, this has the potential to drive better returns.
The five highest yielders today all offer double-digit yields. These are SDCL Efficiency Income Trust (13.3%), Bluefield Solar Income Fund (12%), Foresight Environmental Infrastructure (11.7%), Renewables Infrastructure Group (11.6%), and Greencoat UK Wind (11%).
However, a massive yield’s usually a sign that the market thinks it’s unsustainable moving forward. Therefore, it can be risky to pile in expecting juicy dividends. A 10%+ yield is often a red flag, and certainly needs extra careful consideration.
Arguably, the sweet spot is between the index yield (3.3%) and risky double-digit yielders. Something like Hollywood Bowl (LSE:BOWL), the UK and Canadaâs largest tenpin bowling operator, which offers a forecast yield of 5.3%.
To my mind, there are a few attractive things about Hollywood Bowl. One is that, despite this period of squeezed disposable income, revenue still grew 8.8% last year to £250.7m. Statutory net profit rose 15.7% to £34.6m.
Plus, Hollywood Bowl’s growing strongly in Canada, with two further sites opened last year. Like-for-like sales growth there was 3.2%, with spend per game jumping 14.8%. This shows that customers are willing to spend on food, drink, and amusements once they’re through the door.
Of course, high UK inflation is problematic and adds risk. But it’s worth noting that spend per game was up 9.2% here, despite the tricky backdrop. As a cheaper alternative to theme parks for inflation-weary families, I expect tenpin bowling to remain resilient.
Falling intertest rates should also help loosen consumers’ purse strings.
By 2035, Hollywood Bowl is aiming for 130 centres, up from 92 today. Itâs also expanding its mini golf and electric go-karting offerings in some larger locations.
With the stock trading for less than 11 times next year’s forecast earnings, I think Hollywood Bowl’s worth a look today.
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- With a 5.1% yield and P/E ratio of 13, is this FTSE 250 share a bargain hiding in plain sight?
HSBC Holdings is an advertising partner of Motley Fool Money. Ben McPoland has positions in HSBC Holdings. The Motley Fool UK has recommended British American Tobacco P.l.c., GSK, Greencoat Uk Wind Plc, HSBC Holdings, Hollywood Bowl Group Plc, and Tritax Big Box REIT Plc. 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.
