There are a lot of high-yielding dividend stocks on the FTSE 250 but not all of them are necessarily good value. In many cases, the high yield’s indicative of a falling share price that reflects deeper issues in the company.
Ithaca Energy, for example, has an attractive 15% yield. But it only started paying dividends last year and the shares are down 28% this year. Similarly, Next Energy Solar Fund‘s yield is 12% but the shares are down 22% this year.
That makes me uncertain about their long-term prospects and potential returns. Sure, one day they may grow to become solid dividend payers — but for now, their future is unclear.
The full package
When considering stocks to invest in for long-term gains, I like them to tick several boxes. A good yield is up there but it’s only a small part of a much larger picture.
OSB Group (LSE: OSB) is a UK financial services firm that specialises in niche mortgage markets. It offers a variety of solutions, including commercial and residential mortgages, savings accounts and bridging loans.
The group is considered a ‘challenger bank’, offering an alternative to the traditional ‘top four’ high street banks. It provides services via its various subsidiaries, including Kent Reliance, Precise Mortgages, InterBay Commercial and Heritable Development Finance. Between them, they cover commercial financing, property developer loans and specialist mortgages.
Good value with solid dividends
In 2023, revenue and earnings took a hit, leading to a third-quarter price drop of 35%. It recovered somewhat this year but remains down 28% since its 2022 high of £5.90.
Revenue and earnings are up though, rising 96% and 217% respectively in the first half of 2024 compared to H1 2023. That makes the low price look like excellent value right now. With cash flows forecast to remain high, the price is estimated to be trading at 75% below fair value.
This is further supported by a forward price-to-earnings ratio of 4.5, far below the industry average of 13.6.
With an 8.3% yield, it’s one of the top-yielding dividend payers on the Footsie. While it doesn’t have a particularly long track record, it’s been increasing dividends for almost 10 years, barring a brief reduction in 2019. Overall, the group’s final dividend has grown from 3.9p in 2014 to 32p last year.
It looks likely to continue growing, with the yield forecast to reach 8.67% in 2025, paying 33p per share.
Risks
As a loan and mortgage-focused bank, OSB’s at significant risk from interest rate changes. An economic downturn could hit the property market hard, leading to mortgage defaults that would cost the bank.
It also operates in a tough market, competing against much larger more established banks. If faced with an uncertain economic environment, consumers are likely to opt for brands they are familiar with. Both these factors could hurt the share price.
All things considered, the company appears to be one of the more established high-yield dividend stocks on the FTSE 250. Recent performance is impressive and the low price looks like great value.
As with any investment, there are some risks. But I’ll happily buy more of the stock next year if it continues to deliver similar results.
The post An 8% yield and P/E ratio of 4.5! Surely this FTSE 250 stock deserves more attention? appeared first on The Motley Fool UK.
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Mark Hartley has positions in OSB Group. The Motley Fool UK has no position in any of the shares mentioned. 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.
