When looking to boost my passive income through dividends, high yields are tempting. After all, I want to ensure I receive the maximum return on my investment.
One stock with an inflation-beating yield I want to take a closer look at is Energean (LSE: ENOG).
Oil and gas
Energean is an oil and gas business. Its main focus is the exploration, production, and commercialization of crude oil and natural gas. It operates across the world but the bulk of its revenue comes from Europe and crude oil sales in that region.
So what’s happening with Energean shares currently? As I write, they’re trading for 1,100p. At this time last year, they were trading for 1,304p which equates to a 15% drop over a 12-month period.
The investment case
Starting with perhaps an obvious point — the demand for crude oil is rising throughout the world. This is because it is key to many aspects of daily life, especially commercially such as manufacturing and power generation. Energean makes most of its money from selling crude oil. This heightened demand could translate into future earnings and investor returns.
Speaking of returns, Energean’s 8.2% dividend yield is enticing at present. Energean has a good record of performance in recent years. Since 2020, it has grown revenue and profit each year. In fact, 2022 revenue increased by nearly 48%. Also, a 118% increase in net profit meant that its dividend increased nicely and it managed to continue paying quarterly dividends. However, I do understand that past performance is not a guarantee of the future. Furthermore, dividends are never guaranteed.
From a growth perspective, Energean has said it is looking to increase its payout in the coming years through earnings growth. This could easily push the yield above 10%. The high yields being mentioned here are well above FTSE 100 and FTSE 250 averages. Again, forecast earnings are never guaranteed, so I must not get carried away by this.
To the bear case then. One big issue for all oil and gas companies is its assets and operational problems. Energean is no different. Operational issues at production sites can impact the level of oil and gas produced. This can then impact sales, earnings, and returns.
In addition to this, Energean could find that exploratory assets that promised a lot, in fact, yield nothing. This can be potentially disastrous as future earnings forecasts could be underpinned by an exploratory asset being fruitful. This can impact any payout as well as investor sentiment, and this can send Energean’s share price downwards.
Better high yields elsewhere
After reviewing the pros and cons, I’ve decided to keep Energean shares on my watch list. I must admit the current level of payout is tempting. However, the pitfalls mentioned earlier are putting me off.
Ultimately, I believe there are better dividend stocks out there that would provide me with consistent returns, with similar high yields and less risk. I will keep a close eye on developments though.
