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A £1,000 investment from October 2020 in a fund that aims to track the FTSE 250 index is now worth £1,403. That’s a 40% return, but the index itself is only up 22%.
The difference is dividends – reinvesting cash distributions, rather than using them as passive income, that has generated an extra 18% for investors. And this is something to pay attention to.
Dividend stocks
I think the FTSE 250 has a number of interesting dividend stocks. One example is Primary Health Properties (LSE:PHP) – the real estate investment trust (REIT) that leases a portfolio of GP surgeries.
As a REIT, the company has to distribute 90% of its taxable income to shareholders. And over the last five years, the firm’s paid out 33.4p per share in dividends.
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Right now, the stock’s trading at a price-to-book (P/B) ratio of 0.85. That means every 1p per share Primary Health Properties retains pushes the share price up by 0.85p. Given this, investors stand to do better from the firm distributing cash, rather than hanging on to it.
But this can create challenges when it comes to expanding the portfolio. Being unable to retain cash means the firm has to use either debt or equity (or both) to grow and this can be risky. And the firm has just made a big acquisiton in the form of Assura.
An 8% dividend yield offsets some of this risk, but there’s a lot to do in terms of restructuring the portfolio. So while I think the stock’s worth a closer look, investors should be careful.
Growth stocks
Some of the best FTSE 250 investments however, haven’t been dividend stocks. They’ve been shares in companies that have been on the up and heading for the FTSE 100.
Diploma and Games Workshop are good examples from the last couple of years. And I think Gamma Communications (LSE:GAMA) might be a future candidate.
The company’s a specialist in cloud-based communications software and infrastructure for (primarly small) businesses. That sounds complicated, but it’s more straightforward than it seems. Put simply, the firm helps companies shift their phone communication services to the cloud. That’s important with the UK set to switch off its legacy copper network in 2027.
The stock’s down almost 39% in the last 12 months as macroeconomic uncertainty has caused businesses to delay making changes. That’s a risk in the near term, but it can’t go on forever.
With a market value of £928m, Gamma’s nowhere near reaching the FTSE 100 yet. But I think it has a lot in common with some of the firms that have been before, which is why it’s on my buy list.
Total returns
The FTSE 250’s returned an average of just under 7% a year since 2020. During that time the FTSE 100 has generated annual returns of just under 14%. Whether it’s growth or dividends though, I think the FTSE 250 has stocks that investors should take a look at. Primary Health Properties and Gamma Communications are just two of these.
