Finding FTSE 250 shares with above-average yields can help investors tap into a reliable source of passive income. Even when starting with a modest sum of £500, it’s still possible to buy hundreds of shares in a company. Here’s one I’ve spotted that I believe is worthy of consideration.
The glue of the financial system
I’m referring to TP ICAP (LSE:TCAP). The stock is up 19% in the past year, with a current dividend yield of 5.27%. The company is the world’s largest interdealer broker. In simple terms, it acts as a middleman between major financial institutions, helping them buy and sell anything from stocks to bonds.
It makes money primarily through commissions and fees generated when institutional clients trade through its platforms or brokers. The logical takeaway here is that TP ICAP tends to outperform when markets become volatile. Trading volumes increase due to higher client activity, which has been a theme over the past year (and a key driver behind the share price gains).
Back in March, the full-year results showed profit at the upper end of market expectations. Revenue grew by 4.4%, which was strong given that the previous year’s results also included a bumper year from trading volatility. With particular relevance for income investors, the firm upped its final dividend by 2.7% to 11.6p per share from 11.3p. This means the total full-year dividend increased by 4.3% to 16.8p per share from 16.1p in the previous year.
Income sustainability
Earnings cover remains healthy, with payout ratios at 67%. This means the company retains a decent chunk of profits after paying shareholders, a green flag for sustainability. The business also generates strong cash flow and recently launched another £80m buyback programme, suggesting management feels confident about the balance sheet and future earnings outlook.
If someone invested £500 in the stock today at a share price of £3.17, they would buy 157 shares, with some change left over. This could generate £26.23 in dividends in the following year.
Turning to the outlook, I think few would disagree that the markets are likely to stay volatile in the coming year. This ranges from conflict in the Middle East to the US mid-term elections and much more. It’s hard to see products like oil and gold trading in tight ranges, and so the business should see heightened client activity remain.
It’s also good to note that the price-to-earnings ratio is 9.48. This is just below my fair value benchmark of 10. The takeaway here is that TP ICAP isn’t an overvalued company and isn’t at risk of an immediate share price correction.
A balancing act
Still, there are risks investors shouldn’t ignore. Trading activity can cool quickly if markets become too stable, which would hit commission revenues. Competition from electronic trading platforms also remains intense, potentially eroding the firm’s market share.
Even so, I think TP ICAP is a good example of an income share that has momentum right now.
Jon Smith has no positions in the shares mentioned. The Twelfth Magpie has recommended Tp Icap Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor and Hidden Winners.
