2 mid-cap shares with income potential

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2 mid-cap shares with income potential

While the FTSE 100 has experienced a disappointing run since May, the FTSE 250 has delivered an even worse performance. It has declined by 18% in the last seven months, while the FTSE 100 is down by 14% during the same time period. One reason for this could be the greater exposure of the FTSE 250 to the UK economy at a time when the political and economic outlook is relatively uncertain.

A consequence of falling market valuations is higher dividend yields. A range of stocks in the FTSE 250 now offer impressive income returns. While potentially volatile, here are two stocks which could deliver dividend growth potential in the long run.

UK outlook

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At the time of writing, the outlook for the UK economy remains uncertain. Theresa May has won the recent confidence vote, but a vote on her Brexit plan could prove to be far less successful. Even reassurances from the EU on the Northern Irish backstop may be insufficient to persuade sceptical members within her own party to back the deal. With 117 of her Conservative Party colleagues having ‘no confidence’ in Theresa May, any deal may end up being voted down as they seek a change in Prime Minister.

As a result, the UK economy seems likely to experience further uncertainty. It may be the case, though, that investors, consumers and businesses are becoming overly concerned about the UK’s exit from the EU. The UK economy is forecast to grow by 1.7% per annum from 2019-2022, while wage growth is at its highest level in a decade. Therefore, while Brexit could disrupt the UK economy, it may not perform as badly in the long run as the valuations of a number of FTSE 250 shares suggest. This could provide investment opportunities across the index.

Income potential

Two shares which have fallen in recent months and now offer relatively high yields are Redrow (LON:RDW) and Tritax Big Box (LON:BBOX). The former is a housebuilder, while the latter is a real estate investment trust (REIT) which focuses on large logistics facilities.

Redrow has a dividend yield of 6% from a payment that was covered 3x by net profit last year. Although the UK housing market is experiencing a slowdown, there remains a fundamental lack of supply which could support price rises in future. While interest rates may rise in the medium term and a change to government policy could limit the impact of the Help to Buy scheme, Redrow’s P/E ratio of 5.4 indicates that it offers a large margin of safety.

Tritax Big Box’s focus on logistics facilities may provide it with a relatively resilient financial performance in the long run. Demand for its assets seems to be buoyant, with the increasing popularity of online shopping helping to support growth across the logistics industry. The stock has a dividend yield of 4.9% following a disappointing share price performance in recent months. Although commercial property stocks could be hit by Brexit fears in the short run, its price to book ratio of 1 indicates that it may offer good value for money.

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