A ridiculously cheap FTSE 250 stock to buy today?

The FTSE 250‘s surged 10% over the last 12 months, delivering long-awaited growth after taking a sharp tumble during the 2022 stock market correction. However, not every stock in the index has enjoyed this comeback.

There are still plenty of discounted opportunities for prudent investors to capitalise on. And one in particular not only seemingly offers terrific value but also a jaw-dropping 9.5% dividend yield. Should I buy it?

A 10% monthly dividend

While most businesses pay dividends every quarter, TwentyFour Income Fund (LSE:TFIF) rewards its shareholders every month. That’s quite uncommon. However, the fund’s corporate structure supports payouts with such a high frequency. After all, the firm manages a portfolio of European asset-backed securities that generate cash flows at regular intervals, which are then passed onto shareholders.

While its parent index has risen by double digits, the same can’t be said for TwentyFour Income. Looking at the share price, the stock has risen only a grand total of 3% despite cash flow from operations increasing, paving the way for higher dividends.

As such, the fund’s price-to-earnings ratio sits at just 5.7 – that’s half its 10.5 average over the last decade. And when pairing a stagnant share price with a rising dividend, the yield’s on the verge of entering double-digit territory. Needless to say, this seems ridiculously cheap. So what’s the catch?

The uncertainty discount

Sadly, the cheap valuation might be justified. As a closed-end investment fund, management doesn’t have to disclose much information about the asset-backed securities within its portfolio. We know that roughly half of the loans are mortgage-backed securities, and the other half are securitised loans.

These can be highly lucrative, providing borrowers keep up with payments. However, as we saw in 2008, a nationwide spike in defaults caused by economic turbulence can cause utter chaos.

Management can dispose of underperforming financial instruments in such a scenario to raise liquidity. However, since these instruments are typically traded over the counter, the transaction may have to be executed at a significant discount to find a buyer.

That’s likely why, despite having £840m of assets on its balance sheet and only £26m of liabilities, the fund’s market-cap is actually lower than the net asset value. In other words, TwentyFour Income looks like a highly lucrative source of passive income, but the FTSE 250 stock also carries significant risk.

My move

By taking on additional risk, investors can seek higher returns. And in this case, the reward for doing so is not only a near-10% dividend yield but also a regular monthly income stream. However, the liquidity risk, paired with the lack of transparency, gives me pause.

Personally, I’m not interested in adding this level of uncertainty to my income portfolio, even with the generous payout. So TwentyFour Income’s not a stock I’m planning on buying any time soon. However, for investors comfortable with a higher level of risk, this fund may be worth a closer look.

The post A ridiculously cheap FTSE 250 stock to buy today? appeared first on The Motley Fool UK.

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Zaven Boyrazian 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.