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These FTSE 250 income stocks trade at minimum multiples of earnings. Could these be great ways for investors to increase their passive income at low cost?
Marks and Spencer Group
Clothing and food retailer marks and spencer (LSE:MKS) has not paid dividends in the past two years. But city analysts expect it to restart its payout policy starting in the current fiscal year and rapidly ramp up shareholder rewards thereafter.
A total dividend of 4.5 pence per share is expected for the financial year to March. This results in a decent initial return of 2.8%.
Operations at the company have been more impressive of late: comparable sales rose 7.2% in the December quarter, and its drive to become a multi-channel operator could help it maintain this momentum and deliver long-term growth.
In January, it announced a £480m plan to revamp its store network and take advantage of e-commerce opportunities. This would include the creation of 20 new larger stores that could help the company exploit the ‘Click and Collect’ boom.
But I still don’t think M&S is a good fit for income investors. As the economy falters and high inflation persists, earnings and dividend prospects remain highly uncertain.
The latest data on food inflation from the British Retail Consortium makes for worrying reading. This showed that annual price increases accelerated to 14.5% in February, from 13.8% the previous month. The rising cost of essentials leaves little for shoppers to spend on clothing and household items.
I am also concerned about M&S’s ability to generate strong returns for investors as competition in the apparel industry increases. This has the potential to put revenue and margins firmly at the rear again.
Overall, I think investors should deviate by buying the retailer’s stock. Even a low forward P/E ratio of 10.7 times is not enough to change your mind.
Redrow
Builder Redrow (LSE:RDW) seems like a much more attractive dividend stock to me. And it’s not just because it offers better overall value than Marks & Spencer, at least on paper.
For the financial year through June, it is trading at a P/E multiple of just 6.2 times. Meanwhile, its corresponding dividend yield stands at 5.6%, well above the 3.1% average for FTSE 250 stocks.
I think Redrow’s long-term outlook is much more reassuring than that of the aforementioned retailer. Britain has a massive housing shortage that appears to be getting worse as low building rates persist and the population grows.
However, that does not mean that you would buy the company’s shares to generate passive income. This is because the housing market is locked in a recession that could hurt dividend levels in the short to medium term. Redrow’s own order book fell £400m year-on-year to £1.1bn as of January 1.
The most recent data from Nationwide showed median home prices fell 1.1% last month, the biggest drop in more than 10 years. Buyer demand is weak and could remain so as interest rates continue to rise and the economy worsens.
I think Redrow could make some big profits over the next decade. That is why I continue to hold several FTSE 100 home builders in my portfolio. But I think investors might be better off buying other dividend stocks for above-market returns this year.
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