I’ve been hunting for high yield UK shares that I might be able to use to boost my dividend income. I’ve already set out my perspective on four different UK stocks that offer dividend yields in excess of 10%. Below are another two I have considered adding to my portfolio — and my planned next move on them.
How risky are high yield UK shares?
As soon as I see a share offering a double-digit yield, one of the first questions to pop into my head is, “Why is it offering a double-digit yield?”
Often, a high yield can be a sign that the market is somewhat wary of a share’s prospects. There could be different reasons for that. Maybe investors are sceptical that a company’s future cash flows will be large enough to keep funding the dividend at its current level. Sometimes, a high dividend suggests that the market expects a company’s future business performance to weaken. It can also be that investors are factoring in a dividend cut. If a high yielder cuts its dividend, there is a risk that not only will the dividend be smaller (or zero) but the share price could also fall sharply.
But not all high yield UK shares carry equal risk. Sometimes, there are shares that offer a high yield and may well continue to pay dividends at the same or even higher level in years to come. So, while I think it is important to be cognisant of the risks when considering high yield UK shares for my portfolio, I am open to buying them sometimes.
The oil and gas company Diversified Energy (LSE: DGOC) is one of the high yield UK shares I could consider buying for my portfolio.
Currently the shares yield 10.4%. That is not the only positive thing about the shares from an income perspective. So far, its quarterly dividends this year have all been higher than last year. So, not only is the current dividend yield in double digits, the prospective yield is too.
How safe is that yield? Although the shares trade in London, the company’s operations are in the US. In fact, its income is in US dollars and so are its dividend payments, so there is an exchange rate risk here. The company specialises in buying up assets such as onshore natural gas wells and then operating them. It also has what are known as midstream operations. Those are basically refining, distribution, and storage facilities used before energy reaches its customers. So Diversified has some level of vertical integration, which I think can be good for profit margins and business resilience.
There’s a lot to like about this business model in my view. Smaller, focussed companies can operate wells profitably for decades when they no longer match the needs of large oil majors like Exxon. Demand for natural gas may change as the energy mix used evolves, but I see this as a less immediate risk in the US markets that Diversified serves than in Europe. In any case, I expect natural gas demand from many users like industrial sites to remain for decades. The company has been expanding production in recent years.
A key risk alongside changing energy usage patterns is shifts in energy prices. Falling prices could hurt profits and thus dividends. On the other hand, increased pricing could mean more upside for Diversified. I am attracted by the business model and would consider adding this double digit high yielder to my portfolio.
CMC Markets (LSE: CMCX) is a financial services company. It provides a range of dealing and trading services to investors. But as an investor, perhaps the most interesting thing for me right now about CMC Markets is the dividend yield offered by the company’s own shares. Last year it paid almost 31p per share in dividends. Its share price is currently around 249p, suggesting a yield north of 12%.
This, though, is a good example of the value of doing research into high yielders. While the company’s current (historic) dividend yield is over 12%, I think its prospective yield is much lower. Last year, the company paid an interim dividend of 9.2p per share. Last week the company published its interim results and proposed an interim dividend around 62% lower at 3.5p per share. That doesn’t necessarily mean that the full-year dividend will be less than last year, but it seems highly likely to me. The final payout depends on the full-year profit, as the company maintained its guidance that the total dividend will be around 50% of post-tax profit.
I think CMC might still be an attractive choice for my portfolio. The company has been growing strongly, with earnings per share last year more than doubling. But demand for trading can be subject to significant swings. That can mean that revenue and profits growth at a firm like CMC is not very smooth. I continue to see strong prospects for CMC but don’t expect the full-year dividend this year to match last year’s. I therefore wouldn’t buy CMC for my portfolio if I was focussed on high yield UK shares.
My next move on these high yield UK shares
There are a number of FTSE 100 companies with high single-digit yields and even some with double-digit yields, like BHP. But I still think it’s worth considering CMC Markets and Diversified Energy for my portfolio.
I like CMC Markets for its long-term business growth prospects. However, I don’t expect it to maintain a double-digit dividend yield this year. The income prospects may still be attractive. The company’s interim dividend suggests a full-year prospective yield of around 4% if the final dividend cut is of similar magnitude. That is decent but, for income alone, not enough to make CMC Markets a compelling buy for my portfolio right now.
By contrast, I think buying Diversified Energy for my portfolio today could give me a double-digit yield in future. While I recognise the risks inherent in energy demand and pricing, I would be willing to add Diversified Energy to my portfolio.
Christopher Ruane owns shares in ExxonMobil. 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.