As an investor, dividend yield is an important consideration for me. If I invest £100 in a 1%-yielder, I will hopefully earn £1 a year in dividends. But if I put £100 into shares with double-digit dividends, I might be looking at annual dividend income of £10, or more.
That is a big difference. Then again, sometimes a high yield reflects a high risk. No dividend is guaranteed.
Persimmon
Housebuilder Persimmon is one of the few FTSE 100 members to pay a double-digit dividend (another is Rio Tinto). With a dividend yield of 10.4%, Persimmon pays out well over twice the average of its peers. How come – and can it continue?
One reason is the company’s policy of returning excess capital. While many rivals keep a lot of extra capital in their business, Persimmon pays it out as dividends. That means its dividend is covered by earnings, but only narrowly. So if earnings fall, for example because of a housing market crash, I would expect the dividend to follow.
Another reason for the high yield is that investors have been turning more negative on builders like Persimmon, pushing the yield up as the share price falls. The Persimmon share price has fallen 29% in the past year. I like the company’s high profit margins and reckon that even if housing prices fall, there will still be demand for new housing. So I would consider holding Persimmon in my portfolio.
Diversified Energy
Another investment that offers me double-digit dividends at the moment is Diversified Energy (LSE: DEC). The gas and oil company is little known compared to industry giants like Shell and BP. But it is the world’s biggest owner of natural gas wells, with over 60,000 of them in its portfolio.
However, those wells are typically small ones. They are often in the sunset years of their production. The business model is to eke out remaining gas from wells the company can buy cheaply. That has helped it pay a hefty dividend. Currently, the Diversified Energy yield is 10.7%.
But the cost of capping so many wells when they are retired could eat into Diversified’s profits. It is a relatively new company so we simply do not know how well its business model is likely to work over the long term.
Another risk is moves in gas prices. At the moment, high prices can help profits. But if gas prices collapse, that could hurt the profitability of the company.
Although I like Diversified’s innovative business model and am tempted by its yield, the risks are a bit too much for my tolerance. So I do not plan to add it to my portfolio.
Making a move on double-digit dividends
That could change if Diversified demonstrates it can cap thousands of wells a year without hurting profitability too much.
Meanwhile, I would think about adding Persimmon to my portfolio. It too has risks, as I would expect from any shares and certainly those offering double-digit dividends. But as a buy-and-hold investor, I would be happy to tuck it away in my portfolio for years to come.
