The FTSE 250‘s mostly known for UK growth stocks. But it still has a wide range of dividend-paying enterprises in its roster, many of which currently offer impressive dividend yields.
This list includes polymer specialist Victrex (LSE:VCT), whose shares are offering a staggering 8.6% yield right now. That’s more than double the stock market average. And with a dividend per share of 59.56p, buying 8,394 shares is enough to unlock a £5,000 passive annual income stream.
So is this a no-brainer?
Inspecting the dividend
High yields are often dubious and can be an early warning signal that something’s wrong. Victrex has certainly had its fair share of challenges lately.
A global slowdown in the industrials sector saw demand for its PEEK polymer materials suffer, causing revenue and earnings to slump. Market conditions have since started to improve, with polymer volumes now back on the rise. However, demand from the medical sector remains soft – a problem given that’s where most of Victrex’s higher margin products are sold.
Nevertheless, management’s guiding for better times ahead with more volume growth, better internal cost controls, improved utilisation, and the ramp-up of production at its new China manufacturing plant.
This confidence is further reflected in the decision not to cut dividends. And once earnings have rebounded, allowing coverage to recover to 2.0 (from around 1.3 as of March), leadership has outlined its ambitions to resume its long history of hiking dividends each year.
So providing there are no spanners thrown into the works, the stock’s high yield seems to be here to stay, before eventually expanding even further in the future. But why aren’t more investors jumping on this opportunity?
What could go wrong?
There’s a wide range of factors responsible for the weak sentiment surrounding this FTSE 250 stock. It doesn’t help that the company’s missed several targets in the last few years, nor that it recently cut pricing guidance for its polymers due to unfavourable product mix and adverse foreign exchange movements.
As such, investors are seemingly keeping this business on a very short leash. Further unfavourable currency fluctuations could cause another earnings miss, especially if medical softness persists. While the firm’s a highly cash-generative enterprise, a delayed end-market recovery with rising macroeconomic uncertainty could force management to reset shareholder payouts.
In other words, even with high conviction from management, the risk of a dividend cut is far from zero. Of course, that also means if things work out better than expected, the share price could rapidly recover as investor sentiment strengthens.
The bottom line
In the long run, the secular demand for lightweight, high-performance polymers bodes well for Victrex and its share price. But in the short term, this business remains riddled with uncertainty. So while snapping up some shares may unlock a substantial passive income, this investment comes with elevated risk that investors must carefully consider.
I’m keeping a close eye on this income stock, and should it show further signs of recovery, I may decide to jump in. But for now, I’m looking at other FTSE 250 opportunities for my income portfolio.
