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One of the attractions of the FTSE 250 is its mix of familiar names and hidden gems. These mid-cap firms don’t always have the global reach of FTSE 100 giants, but their domestic exposure can help limit risks from currency swings. Smaller market-caps can also mean more room for growth.
That said, the trade-off is often volatility, which makes it vital to look carefully at dividend policies, payout ratios and long-term profitability.
When it comes to dividends, many investors prefer a history of consistent payments backed by strong financials. A high yield can look tempting, but without reliable earnings, it may not be sustainable. And that brings me to one lesser-known mid-cap company that caught my attention this week.
Dunelm’s impressive numbers
Dunelm Group‘s (LSE: DNLM) a well-known homewares retailer, selling everything from bedding and bathroom wares to rugs, curtains and furniture. It operates through physical stores, catalogues and its growing online presence. The company’s dividend yield is an eye-catching 7.2%, among the top 30 on the index.
The number that really jumps off the page though, is return on equity (ROE). At 121.78%, Dunelm boasts the highest figure across the entire FTSE 250. ROE measures how effectively a company generates profit from shareholders’ equity and, at first glance, this suggests the business is incredibly profitable.
Combined with a dividend track record that includes five years of uninterrupted payments and two consecutive years of growth, Dunelm certainly looks worth considering.
But as always, I think it’s important to dig beneath the surface.
The risks behind the rewards
While Dunelm’s ROE figure’s impressive, it doesn’t tell the full story. The company’s net margin is just 8.83%, and its free cash flow margin stands at 12.28%. These aren’t disastrous numbers, but they don’t suggest a business overflowing with profitability either.
More concerning is the dividend payout ratio, which is slightly above 100%. That means dividends aren’t fully covered by earnings, raising questions about sustainability if profits don’t keep up.
Then there’s the matter of debt. Dunelm has £377.7m in total debt compared with just £118m in equity. That imbalance is significant. Revenue and earnings are forecast to rise modestly in 2026, but there’s no certainty that those expectations will be met.
If equity weakens further, the company could find itself under pressure to service its obligations. And that raises the real risk of a dividend cut.
In fact, I can’t help but think that Dunelm’s huge ROE figure may be flattered by its financial leverage. High debt levels can artificially boost ROE, making a business look more profitable than it truly is. But if earnings stumble, leverage works in reverse – magnifying losses and potentially putting the balance sheet under serious strain.
My verdict
Dunelm has an attractive yield, a recognisable brand and a dividend history that income investors might find encouraging. But with dividends not fully covered and debt levels sitting uncomfortably high, I think it’s one that investors need to weigh up very carefully.
For those willing to consider risk, Dunelm could still find a place in a diversified dividend portfolio. But without stronger earnings growth, its financial leverage may prove more of a burden than a benefit.
