As an investor who appreciates passive income, I find the prospect of a double-digit percentage dividend yield from a share attractive. Shares yielding 10% are few and far between. But one such high yielder has actually recently raised its annual dividend. Buying it now offers me a 10.7% yield.
Innovative business model
The company in question is gas and oil producer Diversified Energy (LSE: DEC). Unlike many energy giants, Diversified is not a household name. Although it is listed in London, its operations are in the US.
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With a market capitalisation of less than a billion pounds, the company is not a big player in the global energy space. Its innovative business strategy also sets it apart. A lot of energy companies invest in drilling for new wells, hoping to strike it big and find new energy reserves. By contrast, Diversified buys up old wells that have already been in use for a long time. It hopes to squeeze out more gas from them even when other producers have decided to stop pumping. By owning tens of thousands of such wells, the company reckons it can build scale even though each one individually is small.
So far the strategy has been rewarding for Diversified’s shareholders.
This week the company announced its final results for last year. They included an 8% increase in the annual dividend, to 16.5c per share (around 12.5p). That means that the annual dividend per share will have increased by 50% in just three years.
Such dividend increases, along with a double-digit yield, certainly catch my attention as an investor. On top of that, Diversified pays out dividends on a quarterly basis. That could also be attractive from a passive income perspective.
My concerns about this high yielder
But despite the apparent attractions of the share from an income perspective, I have some concerns about holding Diversified in my portfolio.
Energy prices are very volatile right now. High prices could definitely be good for profits at Diversified. But my concern is whether we will see increased production hurting gas prices in the future.
On top of that, I think a big risk to future profitability is the cost of capping wells. With its huge estate of wells, Diversified could face a big bill to stop them leaking gas after the end of their working lives. The company is actively addressing this concern and has even bought its own well capping specialist. But the company still reported an average well retirement cost of $22,500 per well last year. With around 67,000 wells on its books that could add up to large retirement costs in future, eating heavily into profits.
My next move on Diversified Energy
I was already attracted by the yield at Diversified. The growing dividend makes it even more attractive to me.
But I have concerns about the long-term impact of capping the company’s thousands of wells. That could add costs that hurt the firm’s ability to sustain its dividend. So, for now at least, I am not buying Diversified shares for my portfolio.