In life, there’s always a correlation between risk and reward. This is true when it comes to the stock market.
Firms with a high yield typically are more risky to purchase versus lower income alternatives. This doesn’t mean an investor shouldn’t consider it, but rather weigh up whether the risk is worth the potential reward. Here are two examples.
A niche firm not to be ignored
VPC Speciality Lending Investments (LSE:VSL) doesn’t exactly roll off the tongue. But it does explain what the firm does. The company provides asset-backed lending solutions to emerging and established businesses. This is often specialist lending where mainstream banks or brokers aren’t competitive.
The VPC share price is down 9% over the past year, with the dividend yield jumping to a whopping 11.7%.
The net asset value (NAV) of the credit book is down by 4% over the past year. As the share price has fallen by more than this, it means the stock trades at a discount to the NAV. I think this is based on weak investor sentiment right now. The risk is that in a tough economy, there’s a higher risk of firms defaulting on the loans from VPC.
From reading the latest report, I’m not overly concerned about this risk. Apart from one company with a 12.65% exposure, the credit book is well diversified with risk spread through many businesses. Further, the lending is with companies ranging from the US to Germany. This limits specific geographical concerns.
The track record of the dividend payments and growth since 2020 is another reason why I think this could be a smart purchase.
Settling in post-IPO
Ithaca Energy (LSE:ITH) is the new kid on the stock market. It went public in November 2022, even though it was established back in 2004.
Unfortunately, the share price has fallen 33% since the IPO. Part of this was simply due to an ambitious IPO price of 250p, which I feel was far too high. The stock has now settled for the past few months and is less volatile.
However, as an oil and gas operator, I have to accept that volatility will always be a risk buying and selling the stock.
The current dividend yield is 12.72%, making it the second highest in the FTSE 250 index. The half-year report detailed how $266m of dividends have been paid so far this year. It remains committed to paying out $400m for the full-year.
I think this is easily achievable due to the strong financials. For example, it has a leverage ratio of just 0.35x. This shows that the firm has little debt that won’t suck valuable cash out for paying interest on loans. It also had a positive net cash flow of $691m for H1 2023, showing good liquidity management.
I like the fact the firm is focused on both making revenue from existing projects but also on the hunt and investing in future ideas. This should allow it to remain profitable, boosting dividend potential in the long run.
