While the new Labour government wants more investments in the UK, could private investors turn to the FTSE 250 for high dividend yields over the long term?
The FTSE 250 index comprises the 101st to the 350th largest companies - also known as medium-sized or mid-cap companies. While they are not big enough to be part of the FTSE 100, they are still some of the UK’s largest publicly-traded enterprises and often feature as the top stocks to buy.
Richard Hunter, head of markets at investment platform interactive investor, says: “The FTSE 250 index is widely regarded as being something of a barometer for the UK economy, as opposed to the FTSE 100 where some 70% earnings come from overseas.”
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After a weak opening in 2024, so far this year, the FTSE 250 is only up 3.39%, adding to the 3.8% gain from last year where the index lagged the tech-driven US indices by some considerable margin.
But it’s the long-term prospects that get investors really excited. Dan Coatsworth, investment analyst at AJ Bell says: “If you take a step back and look at the FTSE 250 index over a long period, there is a clear story to tell.”
On a total return basis which factors in dividends as well as capital gains/losses, the FTSE 250 returned 469% in the 20 years to 14 June 2024, according to Fe Fundinfo data, compared to 288% from the FTSE 100.
The massive difference illustrates why so many investors have looked for opportunities among UK mid-caps over the years. Mid-caps in the FTSE 250 tend to be established businesses with the potential to grow earnings and dividends at a faster pace than the behemoths found in the FTSE 100. This can translate into superior investment returns over time.
Hunter thinks investors may also be attracted to the ‘worthwhile, if not remarkable’ average dividend yield of 3.3% across the index.
However, Susannah Streeter, head of money and markets, Hargreaves Lansdown says: “It’s important to remember that not all companies make payouts to their shareholders, yields are variable, and no dividend is ever guaranteed.” While Coatsworth adds: “There is no guarantee the FTSE 250 will always outperform the FTSE 100 – indeed, it has underperformed on a five and 10-year basis.”
Nevertheless, on the whole, UK equities trade on meaningfully lower valuation multiples than they have done historically and at a substantial discount to a number of other markets, including the US. Plus, some professional investors are seeing opportunities in mid-caps because the UK economy has been relatively resilient and, political uncertainty aside, there are signs that UK plc could be turning the corner.
Investment management firm Ruffer picks out mergers and acquisitions, led by corporates and private equity, as one catalyst for change. There are many well-run medium-sized businesses that are trading at a discount to their true value, making them attractive bid targets.
Elsewhere, AXA Investment Managers believe several factors should generate a more positive view of the UK among global investors than has been the case since the country voted to leave the EU. These include a more stable policy environment, which could lead policy priorities to shift away from small boats and Rwanda, to climate and energy policy, investment and more flexible trade with Europe.
Law Debenture is the top performer among UK equity income investment trusts over 5 years. Its co-manager Laura Foll says catalysts for change include the potential for interest rates to move down in the coming months, business activity picking up and companies increasingly acting as their own ‘marginal buyer’ by buying back shares.
Foll also picks out improving consumer confidence and a return to real wage growth as providing reason for optimism. “The FTSE 250 is, on average, more cyclical and more domestic in its exposure than the FTSE 100. It follows that FTSE 250 companies’ earnings growth and share prices could stand to benefit from this potentially improving consumer outlook,” she explains.
We asked analysts and professional investors to pick out their favourite FTSE 250 sectors and stocks to watch.
FTSE 250 sectors to watch
Property
A group of property stocks: British Land, Londonmetric Property, Tritax Big Box REIT, Vistry, Bellway and Shaftesbury Capital, all fall under the broader category of real estate, an area that has been firmly out of favour during the past few years of rapid interest rate hikes. However, Dan Coatsworth says: “The prospect of interest rate cuts later this year could see investors scout this area for bargains and see investor sentiment improve towards the space, hence why this is a sector to watch closely.”
Among these, Susannah Streeter picks out Bellway, which is focused on building family homes, and should benefit from Labour’s housebuilding policies and extension of the mortgage guarantee scheme. She says: “Its offer to buy Crest Nicholson has been knocked back, but it clearly still has an eye on acquisition targets in the sector to help propel growth.”
Law Debenture has been adding to building materials companies Ibstock and Marshalls. Foll says: “Both have seen their shares fall in recent years as a result of a difficult backdrop for housebuilding volumes and household spending, but they are among the market leaders in what they produce – bricks and paving stones. If and when housebuilding volumes recover, they should be well placed to see their earnings grow from current depressed levels.”
Technology
There aren’t many tech names on the UK stock market but the upper end of the FTSE 250 index has a few “nuggets”, according to Dan Coatsworth.
He picks out Polar Capital Technology, an investment trust offering diversified exposure to the tech sector. “This might appeal to someone who wants to spread their risks and not place a big bet on a single company,” he says.
Alternatively, he says you could buy a couple of the mid cap index’s biggest tech names. These are focused on the services side of the industry and include Softcat a Marlow-based IT infrastructure provider, and Computacenter, a British multinational based in Hatfield, Hertfordshire, that provides computer services to public and private-sector customers.
FTSE 250 stocks to watch
Greggs
Dan Coatsworth says: “Possibly the UK’s best-loved purveyor of pastry-based goodies, Greggs continues to go from strength to strength.”
Recent performance has been impressive, with last year's sales rising past market expectations. However, Greggs’ ongoing expansion plan means it is planting more flags across the UK, increasing the opportunities to grab a slice of the public’s wallet. Increasing outlets at travel destinations like train stations and motorway services has been a wise development as it decreases dependence on the more volatile retail sector. “Chatter that it is once again exploring overseas options could provide the cherry on top of the cake in terms of sales catalysts,” says Coatsworth.
While, Susannah Streeter adds: “Football fever and Olympics obsessions could prove to be another winner for Greggs this summer, as it rolls out hot evening takeout ranges and offers promotional deals for delivery throughout the events.”
JD Wetherspoon
Pub company JD Wetherspoons could be a stock to watch as it continues to recover from the pandemic hangover which left some stains on the business. Despite being up by 8 per cent over the last year, the shares remain down by 38 per cent over the last three years and by 49 per cent over the last five, leaving the stock relatively cheap on a historic valuation basis.
At its latest trading update in May, the group reported overall sales up 3.3 per cent and a further reduction to net debt. The firm also predicted that full-year profit would be towards the top end of forecasts, compared to its previous view of a “reasonable outcome”.
Hunter points out that Wetherspoons has other strings to its bow to boost revenues such as food sales and. to a much lesser extent. slot and fruit machine takings and pub-attached hotels.
He says: “With management currently upbeat on prospects, a largely freehold estate and reduced competition since the pandemic with the failure of some smaller players, there are reasons to be optimistic about the group’s medium-term profits.”
WH Smith
WH Smith has still not regained its pre-pandemic form in terms of the share price, partly due to its struggling high street stores, which are weighing on the company. However, Streeter says: “The company is shapeshifting and refocusing on the captive market of the travelling public.”
The firms’ aim of being a ‘one-stop for travel essentials’ is also reaping rewards, with travel revenue up 9 per cent in the 13 weeks to the start of June, while it’s expanding the range of products sold in stores.
Plus, Streeter says: “The US market offers opportunity and the winning of a contract in Detroit airport for four new stores is encouraging. If there is an acceleration of its travel focused strategy, there could be a further uplift in the share price.”
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