FTSE 250: 1 share to buy for a special dividend

At FTSE 100 it still remains home to many of the UK’s top dividend payers. That said, a medium-cap cousin, the FTSE 250, still has some decent names. One particular part that stands out for me is this Dunelm The dividend yield on DNLM shares is 6.8%.

Furnishing good results

After hitting multiple record highs during the pandemic, Dunelm’s shares fell by 50% last year. This is because during the cost of living crisis, investors worry that demand will decrease. Thankfully, those fears have been overdone, and FTSE 250 shares have now recovered almost all of their losses, and are up 80% from their bottom.

In fact, Dunelm shares have continued to advance this year with a 25% gain. This was the result of better-than-expected half-year results, as the company has been doing “strict commercial discipline and operational grip”.

Pay dividends

Although not currently a shareholder, it’s always nice to see the FTSE 250 company doing well. This is especially true after I made many bullish calls last year, citing retailers’ strong proposition to deliver value during the cost-of-living crisis, all while increasing market share.

However, I regret selling my stock because the stock has reached my price target. If I stuck out, I’ve got a handsome gain of 60%. That said, I plan to reinvest in Dunelm as it continues to impress on all fronts and, more lucratively, for its special dividend.

In its half-year report, the group announced a special dividend of 40p per share. Considering the forecast of 28p for the final dividend at the end of this year, and 16p for next year’s interim dividend, this yields a solid 6.8% if I were to buy Dunelm shares today.

Cheap stock?

Apart from these dividends, there are other reasons why I want to invest in retailers. For one, Dunelm’s growing market share in home appliances and furniture shows confidence, as it shows the conglomerate’s drive to grow its business efficiently. This is supported by a large number of active customers (+5.7%) and higher shopping frequency (+4.8%).

I also really like their strong balance sheet, which has a healthy debt-to-equity ratio of 10%. Couple that with a rapidly growing free cash flow and it’s no wonder the provider is paying a special dividend. What’s more, the initial headwinds that fueled the FTSE 250’s constituents are now starting to dissipate. Inflation is starting to fall, and the Bank of England is expecting a softer recession.

However, I also have reservations. The main thing is that the current and future price multiples are not exactly the lowest. So, it is not surprising to see the stock with an average price target of £12.90, showing a minimum upside of 5% from the current price.

Even so, I believe these estimates do not take into account the potential rebound of the housing market, which could see higher sales in the medium to long term. The stock is definitely at a higher price, but I believe it is still worth the price because of the upside potential, free cash flow generation, and strong shareholder returns, so I would invest. After all, Warren Buffett once said, “What you pay is what you get”.