The first thing I do when searching for passive income ideas is to look for dividend stocks. Ideally, I want to find companies with high yields, but with dividends that are growing each year. My requirement for high dividend yields normally leads me to the FTSE 100 as it’s full of attractive dividend stocks. But what about the FTSE 250?
Can I diversify my portfolio with these smaller companies, and still generate passive income? I think these two stocks could be the answer.
A FTSE 250 investment company
The first stock I’d buy is the £3.4bn investment company HICL Infrastructure (LSE: HICL). It specialises in making investments in core infrastructure projects primarily in the UK, but also within the eurozone and the US. HICL’s investment proposition aims to deliver long-term and sustainable income from its portfolio, which makes it a strong contender for generating passive income.
I particularly like HICL due to the diversification it can bring my portfolio. It offers something different from the more typical financial services, mining and energy stocks that are big dividend payers in the FTSE 100. For example, HICL shows on its website that its infrastructure investments have provided access to healthcare facilities for more than 10m people. Its portfolio is diversified across defensive sectors such as education and transportation too.
HICL also hasn’t missed a dividend payment since at least 2008. I think this shows the company’s infrastructure investments are critical to a functioning economy. Dividends are also paid quarterly, which is an added benefit to support my passive income stream.
Analysts are forecasting a dividend yield of 4.7% for 2022. This is a very respectable yield for my portfolio. However, there’s been little growth in the dividend over recent years. There’s no growth forecast in 2022 either. On top of this, the share price was extremely volatile during the Covid-related sell-off, which is something I have to keep in mind.
On balance though, I’d buy this FTSE 250 stock to generate passive income.
A slightly more unusual stock for passive income
The next company I’d consider for passive income is Greggs (LSE: GRG). It might not be the first choice in the FTSE 250, simply because the dividend yield isn’t the highest. Nevertheless, it has other attractive characteristics.
First, the forward dividend yield isn’t that low in my view. Analysts are forecasting a yield of 2.1% in 2022. I think this is respectable income for my portfolio.
The biggest draw for me, though, is the potential for dividend growth. Indeed, Greggs is expected to grow its dividend payment by 18% in 2022. There’s a good chance that this growth will continue in the years ahead. In this regard, I was encouraged by the trading update released just this month. Full-year results are now expected to be ahead of previous expectations, with the company saying there are “attractive opportunities to invest for growth”.
However, with Greggs, there’s a risk that these opportunities don’t work out. This would be detrimental to any future dividend growth and then impact my passive income stream.
So, in summary, I view HICL and Greggs as two FTSE 250 stocks with attractive income potential in the years ahead. Greggs should be able to grow its dividend over time, and HICL offers the more dependable and higher yield today.
Dan Appleby has no position in any of the shares mentioned. 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.
