This dividend stock’s yield has gone from 4% to 8%! Time to buy?

Jon Smith spots a dividend stock that enjoyed a rising yield over the past year, but flags up a steep fall in the share price over the same period.

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Investors often focus purely on the current dividend yield of any stock they’re interested in. Yet yield percentages aren’t set in stone and it’s interesting to note how they change depending on the share price’s ups and downs. So, just because a stock has a low yield at the moment doesn’t mean I should ignore it forever. Things change, which is the case for one FTSE 250 firm I’ve noticed.

Understanding the business

A year ago, the dividend yield for Harbour Energy (LSE:HBR) was 4.4%. It has been climbing for pretty much the entire year and currently sits at 8.32%. As a result, this makes it one of the highest yielding options in the entire FTSE 250.

Before we get into more figures, it’s key to note the background of Harbour Energy. It’s the largest London-listed independent oil and gas company with a leading position in the UK. It also has interests around the world, including Mexico and Norway.

This isn’t some kind of commodity exploration penny stock that has no revenue coming in. The business posted a half-year pre-tax profit of $429m. However, the share price is far more volatile than the average FTSE 250 share.

For example, the stock is down 47% over the past year. The profit figure mentioned was a large swing lower from the $1.49bn in the same period last year. Granted, some of this was down to a windfall tax, but it does highlight the nature of the oil and gas sector.

Bringing it back to the income

The reason why it’s important to understand the business is because it has a strong correlation to the dividend potential.

The 47% drop in the share price has acted to push the yield higher. Technically, if the dividend per share remains unchanged, a lower share price increases the yield.

Even though profit has fallen, the company is increasing the dividend payments. It announced $0.12 per share as an interim payment this summer. However, I’m cautious on this because, before 2021, it went for many years without paying any dividend.

Patching it all together

So what we have here is a company that will continue to have a volatile share price, based on oil and gas prices along with future project success. It also has an uncertain track record of dividend payments.

On the other hand, it’s a profitable business. It has zero net debt (as of the half-year end) and free cash flow of $1bn. These factors support the potential for continued dividend payments, due to the firm having good liquidity.

If we were talking about a 4% dividend yield, I wouldn’t think about taking the risk. But at 8.32%, I believe the yield is high enough for investors to be compensated for the risk.

So I’m thinking about adding this to my own portfolio in the near future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. 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.

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