UK small- and mid-cap stocks, like those in the FTSE 250, are a gold mine for income investors thanks to low valuations and high dividend yields.
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.”
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The FTSE 250 gained 6.6% in share price terms in the year to 3 December. But on a total return basis – which factors in dividends – this return rises to 10.4%.
Latest Videos FromMoneyWeek
“Yields on both the FTSE 250 and the FTSE SmallCap (excluding investment trusts) indices remain above the FTSE 100,” said Chris McVey, deputy head of quoted companies at Octopus Investments.
Income investors have a “once-in-a-cycle” opportunity to buy into UK small- and mid-cap stocks at depressed valuations, according to McVey in Octopus Investments’ latest dividend barometer.
“Investors should take advantage of this now as UK smaller-cap stocks can offer them a compelling opportunity in terms of both absolute and relative value, as well as income, benefitting from attractive and growing dividend streams,” said McVey.
Why are FTSE 250 stocks good value for income investors?
UK stocks trade at a discount, especially compared to US counterparts. The year so far has seen a partial narrowing of this divide in the FTSE 100, but the re-rating has yet to spread to UK small- and mid-cap stocks.
This relative undervaluation means that UK smaller companies offer greater dividend yields (which are calculated as a percentage of share price) compared to their larger counterparts.
“There is an exceptional opportunity at the moment in medium-sized UK higher yielding companies,” said Simon Gergel, manager of Merchants Trust (LON:MRCH). “The stock market is highly polarised and negative sentiment about the UK economy has created a great opportunity set for long-term investors.”
“We believe it’s an anomaly that these companies are continuing to fly under the radar for traditional income investors,” said McVey.
Three FTSE 250 dividend stocks
Ithaca Energy
Analysts led by Werner Riding from investment bank Peel Hunt rated Ithaca Energy (LON:ITH) a Buy and raised their price target to 260p from 200p following strong third-quarter results announced on 19 November.
“Ithaca has continued to build momentum year-to-date, supported by active NOrth Sea development and strategic partnerships,” wrote Riding.
As of 4 December, Ithaca offers an impressive annual dividend yield of 10.9%.
B&M
Considering the pessimism over the UK economy that abounded at the start of the year, some experts anticipated discount retailer B&M (LON:BME) to struggle.
That has proved to be the case, with the company enduring a stark selloff. Shares are down 55% this year, but Peel Hunt analysts are optimistic that new management can turn the company’s fortunes around.
“Arriving at B&M, new CEO Tjeerd Jegen faced a long to-do list,” said Peel Hunt analysts Jonathan Pritchard and John Stevenson in a research note. “Before, too much time was spent obsessing over store aesthetics and too little on understand what customers wanted [and] what worked for B&M.”
Providing that the return to retail basics is successful, Pritchard and Stevenson “see potential for a format that clearly works to return to its past glories”. They set a price target of 200p on 25 November, implying 22% gains from the latest close at the time.
Income investors will note that, trading at current depressed levels, B&M offers a dividend yield of 8.2%.
TBC Bank
Shares in TBC Bank Group (LON:TBCG) have gained 29% in the year to date. Despite these gains, it is still offering a dividend yield of 5.2%.
While forecasts for 2026 have been cut thanks to regulatory changes in Uzbekistan, where the Bank does most of its business, Peel Hunt analyst Start Duncan views this as “a delay rather than a fundamental change to the longer-term growth potential”.
