On the hunt for passive income in the FTSE 250? Here’s 1 stock I’d buy and 1 I wouldn’t touch with a bargepole

When it comes to finding stocks that can provide handsome passive income, I think the FTSE 250 is a great place to look. It’s home to a variety of exciting companies offering investors chunky dividend yields.

The average yield on the index is 3.3%. But there are currently 24 companies offering a payout of 7% or higher. That trumps the FTSE 100, which has just four companies offering a yield of 7% or more.

Of course, while it has a wide range of stocks offering high yields, that doesn’t necessarily mean I’d buy them all. Dividends are never guaranteed. Meaty payouts can be attractive on paper. However, they’re not always sustainable.

With that, here’s one FTSE 250 constituent I’d buy today if I had the cash, and one I’d avoid.

Steering clear

Let’s get the ball rolling with the stock I’d give a wide berth in today’s market. Despite its impressive 9.2% yield, I’d avoid asset manager abrdn (LSE: ABDN).

When it comes to assessing whether a dividend is sustainable or not, there are a few signs I look for. The first is dividend coverage. As I write, abrdn’s is around one. A ratio of two or above signals that a dividend should be sustainable. With that in mind, I’m concerned abrdn may not be able to keep up its chunky payout moving forward.

On top of that, its share price performance could also be cause for concern. In the last five years, the stock has lost 43.7% of its value. While its shares may look cheap, could it be a classic value trap? Potentially.

I’m not completely writing off abrdn and there are aspects of the business I like. For example, it has put in place a reorganisation programme aimed at cutting costs. So far, it has made decent headway with this. In its most recent results, adjusted operating expenses fell 13%.

However, with its slim dividend coverage, I’m staying away from abrdn.

One I like

On the other hand, a stock I’m keen on is ITV (LSE: ITV). Its shares have been flying this year. So far in 2024, they’re up 29.5%.

While its rising share price has pushed down its yield, it still has a 6.1% payout covered nearly two times by earnings.

As well as that, management seems eager to keep rewarding shareholders, which is something I always like to see. We saw this most recently when the business put in place a £235m share buyback scheme following the sale of BritBox.

The business faces ongoing pressure from online streaming platforms such as Netflix. That, as well as a decline in spending on traditional broadcasting, has seen the stock suffer in recent years. Moving forward, ITV will have to navigate and adapt to these challenges.

But so far, the business is doing a good job at it. For example, it’s currently in the process of building up its digital platform, ITVX. In the first half of the year, monthly active users jumped by nearly 20%.

ITV also looks like good value for money. Right now, it’s trading on a price-to-earnings (P/E) ratio of just 7.5. Its forward P/E is 8.8.

The post On the hunt for passive income in the FTSE 250? Here’s 1 stock I’d buy and 1 I wouldn’t touch with a bargepole appeared first on The Motley Fool UK.

More reading

Is this 6.2%-yielding FTSE 250 dividend gem also one of its biggest bargains?

Here’s how I’d create a passive income stream worth over £18K annually

I want to add these 2 FTSE gems to my Stocks and Shares ISA

A 9.8% yield but down 20%! Is this FTSE 250 gem an unmissable passive income opportunity?

As short interest increases by 35%, is the ITV share price in trouble?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.