Hunting passive income? Consider these high-yielding FTSE 250 dividend stocks to buy in May

I’ve lately been hunting dividend stocks to buy for passive income, and it’s been a fascinating journey. For those new to the concept, dividend investing is essentially letting your money work for you.

Companies share a portion of their profits directly with shareholders providing a steady stream of cash without you needing to lift a finger.

This passive income is a powerful tool for building long-term wealth, especially when you reinvest those payouts to buy more shares. In this way, the magic of compounding returns really shines.

Two dividend prospects

While many investors flock to the glamour of the FTSE 100, the FTSE 250‘s often where the real gems hide. These mid-sized companies are frequently overlooked by the big institutional funds, which can lead to higher yields and better value for the individual investor.

If you’re looking to boost your portfolio’s income, I’ve been keeping a close eye on two particular names: OSB Group (LSE: OSB) and Aberdeen Group.

Both currently offer similarly atttractive yields, but may appeal to different investors in other ways.

OSB Group

I’ve already held shares in this challenger bank for several years and I’m considering buying more. The stock remains a compelling option for those chasing both income and value, though it comes with specific trade-offs.

Let’s take a look at its numbers:

• Yield: 6.8%.

• Payout ratio: 46.7% (a comfortable margin of safety).

• Cash coverage: 2.83 times (easily covers payments).

• Track record: 12 years of consistent payouts.

• Valuation: forward price-to-earnings (P/E) ratio of 6.56 (undervalued).

Overall, it looks like a good option for both value and income.

However, investors should note the balance sheet looks somewhat stretched, with liabilities currently exceeding current assets. If changing market conditions or falling interest rates dent its income, it’s financial position could become risky.

Aberdeen Group

If you prefer a steadier hand, Aberdeen Group might be more up your street. It’s less of a pure value play than OSB, but it boasts a significantly more reliable historical track record.

• Yield: 7%.

• Payout ratio: 67.4%  (sufficient).

• Cash coverage: 2.29 times (covers payouts).

• Track record: 20 years of consistent payments (impressive).

• Valuation: forward P/E ratio of 14.10.

Aberdeen’s coverage is more limited but its balance sheet is solid. With equity far exceeding total debt, there’s less chance of debt obligations prompting a dividend cut. However, as a global investment group, market fluctuations can significantly impact its share price.

So what does this all mean for investors?

While both stocks offer a similar yield, the choice comes down to your personal risk appetite when considering whether to buy.

OSB Group offers a cheaper valuation if you are willing to overlook the tighter balance sheet, whereas Aberdeen provides the reliability of a longer, proven history and a stronger financial position.

While dividends remain one of the most reliable ways to generate passive income in an unpredictable market, remember that income’s only half the battle.

A healthy portfolio should also include some growth and defensive stocks, ensuring you aren’t putting all your eggs in one basket.

Sector diversification is your best friend here. By spreading your risk across different industries, you ensure that a downturn in one area doesn’t derail your entire plan.

Keep your eyes on the long term, stay disciplined, and let those dividends do the heavy lifting for you.

The post Hunting passive income? Consider these high-yielding FTSE 250 dividend stocks to buy in May 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.

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