While investors have historically looked towards the FTSE 100 index for high dividend yields, there might be reasons to think that, in 2025, certain FTSE 250 dividend stocks are worth considering.
The FTSE 250 index comprises the UK stock market’s 101st to 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% of earnings come from overseas.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The FTSE 250 has traded flat during January so far, and has gained around 9% over the 12 months to 21 January.
During 2024, the index gained 4.9% in terms of share price gains, but the dividend stocks within the FTSE 250 brought its total returns up to 8.1% for 2024.
Its weighting towards the UK economy means the index isn’t in for an easy ride this year. “Approximately half of the FTSE 250 derives its earnings from the UK and the outlook for the economy continues to weaken. That implies the UK mid-cap index could find it harder to make significant headway this year,” says Dan Coatsworth, investment analyst at AJ Bell.
The index has proven to be a strong performer over the long term, though. 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.
Hunter thinks investors may also be attracted to the ‘worthwhile, if not remarkable’ average dividend yield of 3.36% across the index.
It’s important to remember that not all companies make payouts to their shareholders, yields are variable, and no dividend is ever guaranteed.
That said, UK equities trade on meaningfully lower valuation multiples on the whole than they have done historically, and at a substantial discount to a number of other markets, including the US. This means that, as long as investors are careful about the stocks they choose, there are some attractive dividend yields on offer among the FTSE 250 stocks.
Four FTSE 250 dividend stocks
Ithaca Energy
Ithaca Energy (LON:ITH) offers “outstanding dividend yield”, write Peel Hunt analysts Werner Riding, Sam Wahab and Andy Crispin in a note. “Ithaca continues to demonstrate its commitment to shareholder returns, paying a $100 million interim dividend in Q3 2024, followed up with a $200 million special dividend in Q4 2024.
“We anticipate another $200 million final dividend to be declared with the FY 2024 results in Q1 2025, and then for the same distribution pattern to repeat through the rest of the year… we therefore expect Ithaca to return $500 million in cash dividends during FY 2025, bringing the total payout to $1 billion over 2024/25E.” All in all, they say, this equates to an estimated yield of around 22% for 2025 (based on its share price as of 6 January).
Ithaca completed a merger with Eni UK last year, making it “a substantially larger and financially stronger business, with significant financing capacity to fund future growth”, according to Riding, Wahab and Crispin.
B&M
Retailers like B&M Group (LON:BME) could struggle this year “if the economy remains stuck in the mud”, according to Coatsworth.
Conversely, Peel Hunt analysts Jonathan Pritchard, John Stevenson and Ruben Pathmanathan think that its positioning as a discount retailer will make it stand out against competition. “It runs high sales densities and has a strong buying function, plus a tight eye on costs means that the margin outcome is higher than at other discounters,” the analysts note.
They anticipate a 9.0% dividend yield in the year to March 2025, and a 9.6% yield in the year to March 2026.
Management lowered the mid-point of the guidance range by approximately 1% in a January trading update, and shares fell 14.5%. In the view of Deutsche Bank analyst Adam Cochrane, this reaction was overblown, especially given the stock was already trading at just 9x expected 2025 earnings.
“We believe the main issue lies in price deflation,” says Cochrane. “Management has lowered prices in the largest general merchandise categories by 3-5% but the volume uplift takes time to come through. The weak sales in FMCG suggests that more may need to be done on pricing for this key footfall driver.”
However, Cochrane reiterated a Buy rating, and while he lowered his price target to 500p from 620p, this still implies a 56.3% gain in share price alone, before the dividends are even factored in (based on closing price on 22 January).
Peel Hunt likewise felt the market reaction was overblown: “We believe a 10% yield for a company like this is a gift”, wrote Pritchard, Stevenson and Pathmanathan following the trading update.
TBC Bank
Given the weak outlook for the UK economy, Coatsworth thinks that “the FTSE 250 is going to be even more reliant in 2025 on its overseas earners”. While Coatsworth picks out stocks like Burberry, Investec and Carnival as the foreign earners with the index’s greatest weighting, investors specifically looking for dividend stocks might consider Georgia-based TBC Bank (LON:TBCG) for some international diversification.
Peel Hunt analysts Robert Sage and Stuart Duncan note that “the Georgian economy has continued to strengthen through 2024, despite political issues, and TBC’s near-40% market share allows it to exploit the supportive operating environment”.
They also highlight the success of TBC’s Uzbek arm, which boasted a return on equity of 28% during Q3 2024. Peel Hunt expects a dividend yield of 8.9% in the year to December 2025, based on its share price as of 2 December 2024 (shares have since gained 3.1% as of 21 January).
Dunelm
Like B&M, Dunelm (LON:DNLM) faces headwinds with the UK economy being in a precarious state.
But while the industry struggles, Dunelm is “continuing to take market share”, according to Peel Hunt analysts John Stevenson, Jonathan Pritchard and Ruben Pathmanathan.
They note that recent declines in its share price mean that it now offers a dividend yield of around 8%, and “while recent trading has been challenging, Dunelm continues to outperform, delivering sales and profit growth.
“With the balance sheet likely to be moving into a net cash position, the next special dividend announcement looks imminent. We see any share price weakness in Dunelm as a buying opportunity,” they add.
-
Landlords ordered to make rental properties more energy efficient by 2030The government has said rental properties must have a minimum EPC rating of C by 2030. We explain how much it will cost landlords to upgrade their buy-to-let portfolio
-
Primark owner Associated British Foods is an overlooked gem going cheap — should you buy shares?Associated British Foods, the owner of Primark, is a family-owned business, which means it is passed over by the increasingly popular passive investment funds. That spells opportunity for private investors, says Jamie Ward.
