A high-quality FTSE 250 stock

Indivior (LSE:INDV) manufactures treatments to help patients overcome opioid addiction. Opioid addiction, particularly in the US, is a growing problem. Indivior has also brought the first subcutaneous long-acting injectable treatment for schizophrenia to market. That is an essential step in diversifying the company’s revenues.

Indivior looks like a company that is high in quality to me. The company has been profitable in five of the last six years, with 2020 being the exception. Operating margins average a respectable 13.9% and are fairly stable. Trailing 12-month returns on capital and equity come in at 21% and 144%, respectively, which beats most companies in the same industry and indeed the wider market. However, I am mindful that the company is named in a class-action lawsuit related to the opioid crisis in the US and legal risks remain elevated.

A good value mid-cap stock

FirstGroup (LSE:FGP) operates bus, coach, and train services in the UK and North America. First Group suffered large revenue and stock price drops during the pandemic, but it has survived relatively unscathed. Yes, balance sheet debt climbed during the pandemic. But the sales of US businesses in 2021 has softened the impact. These sales also explain why revenue forecasts for 2022 and 2023 are lower than pre-pandemic levels.

I think FirstGroup looks good from a value perspective. While its price-to-earnings ratio of 14.4 does not scream cheap, the stock’s price-to-book and price-to-sales ratios of 0.62 and 0.17 are well below industry and market averages. Ultimately, the stock’s fate will be decided by how well its operations bounce back from the pandemic. There is a concern that bus and rail services will never return to pre-pandemic volumes. In terms of non-work travel, I am not convinced. However, working from home is here to stay and will keep some workers off buses and trains some of the time.

A low-volatility FTSE 250 stock

The Twentyfour Income Fund (LSE:TFIF) holds a portfolio of UK and European residential mortgage-backed securities and collateralised loan obligations. The company aims to deliver a dividend yield of around 6% to its investors from this portfolio. In terms of yields, 6% is quite high, and it is not achieved without taking a commensurate degree of risk. Just shy of three-quarters of the portfolio is rated below investment grade, and the portfolio could be subject to large losses. This would particularly be true when there is stress in the markets.

However, on the whole, Twentyfour Income stock has shown low levels of volatility compared to other FTSE 250 members. A good deal of the fund’s portfolio is in floating interest rate securities. So, a rising interest rate environment should be good for the company’s stock price. This makes the stock different from other equities found in the FTSE 250 index, and that’s why I hold it in my portfolio.

From the 20+ stocks the screen returned, Twentyfour Income and BAE stood out.

Twentyfour Income Fund

The first thing I do when considering buying a listed closed-end fund like Twentyfour Income is to look at its portfolio. Twentyfour Income holds UK and European asset-backed securities. Half of these are residential mortgage-backed securities, and 40% are collateralised loan obligations. About 23% of the portfolio is rated investment grade, as of the October 2021 factsheet. This fund owns complicated assets that are either unrated by credit agencies or rated below investment grade on the whole. Yields tend to be higher with such assets, but so are the risks. I am comfortable with the complexity and the risk implied by low credit-rated holdings.

Twentyfour income targets a dividend yield of 6%. It was 5.62% in 2021, which is pretty close. Aside from the yield, Twentyfour Income might offer some diversification benefit to my portfolio. The securities it holds tend to pay floating interest rates, so the yield should increase as interest rates rise. A rising rate environment might be damaging for traditional stocks and shares. However, non-investment-grade securities tend to behave just like equities in times of economic stress and offer negligible diversification. On balance, I think Twentyfour Income is a good income generating stock to add to my ISA.

A top UK dividend stock for 2022

BAE was one of the few companies to increase its dividend per share paid during the pandemic. The company has not cut its dividend for over 20 years. Analysts expect the streak to continue as they have forecast BAE to increase its dividend in 2021 and 2022.

BAE is in a strong position within its defence, aerospace, and security industries. Defence spending keeps increasing. Breaking into the industry is difficult, so BAE is one of only a few players. Its revenues have ground higher by 2.8% over the last five years. However, revenue for the company does tend to be a bit volatile. BAE has relatively few customers, and they are typically nation-states. Its revenues depend on large contracts to build warships and the like. These take a long time to complete and pay off in fits and starts, and revenues and profits can swing up and down.

If earnings swing about, then dividend cover can look shaky. Decreasing dividend cover can motivate investors to sell in fear of a dividend cut, only to get back in when it is not. This might explain why the stock has gone sideways for five years. Nonetheless, the forward yield on BAE is about 4.72%, and with a healthy order book to work through, I think BAE’s dividend streak will continue for the foreseeable future. I continue to hold BAE as a top UK dividend stock in my ISA for 2022 and beyond.