3 amazing — but dirty — FTSE 250 shares that are great for passive income!

Ethical investors hate the idea of putting their money into these FTSE 250 energy stocks. But their massive yields make them hard for me to ignore.

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There are three FTSE 250 stocks that are presently offering incredible yields of 11%-19%. I’m always on the lookout for ways to generate additional passive income, which is why they’ve recently grabbed my attention. It’s rare to find such high returns in the index.

But they all operate in the heavily polluting energy industry. However, whether we like it or not, the demand for fossil fuels continues to increase. Ethically-focused investors, understandably, won’t go near them. But I want to find out more.

Close to home

Ithaca Energy (LSE:ITH) operates and develops oil and gas fields in the UK.

Its flagship projects are the Cambo and Rosebank oil fields, both of which are located to the north west of the Shetland Islands.

During its short life as a listed company — its IPO was in November 2022 – its share price has fallen 34%. I think this is due to the government’s Energy Profits Levy. Otherwise known as the ‘windfall tax’, this has reduced the company’s free cash flow, causing it to defer other projects.

Even so, it still managed to spend $400m (equivalent to 21.22p a share) on its dividend in 2023, which if repeated next year, means the shares are currently yielding an impressive 13.9%.

On the other side of the Atlantic

There’s another FTSE 250 company in the same sector as Ithaca that doesn’t have to worry about the EPL. That’s because its oil and gas fields are located in the US.

Instead of spending vast sums developing new wells, Diversified Energy Company (LSE:DEC) buys existing ones and seeks to extend their useful lives.

Since November 2022, its share price has fallen 42%. But the company has reported strong results and raised its dividend. Diversified Energy should pay at least 17.52 cents (14.08p) a share in 2023, implying a yield of 19.3%.

The poor stock performance could be due to investors concerns about the company’s borrowings, which are on the high side.

Europe-focused option

Energean Oil and Gas (LSE:ENOG) operates oil and gas fields in the Mediterranean.

It paid its maiden dividend in 2022, and looks set to return $1.20 (96p) to shareholders in 2023. If I’m correct, the shares are presently offering a yield of 11.2%.

Just like the other two, its stock has struggled over the past 12 months and has fallen 42%.

Of concern is that the company has interests in Israel. And the war in Gaza has delayed the completion of an oil pipeline project.

Buyer beware

Of course, dividends are never guaranteed.

All three companies are exposed to energy market volatility, which makes their earnings and cash flows sensitive to changes in commodity prices. During difficult times, returns to shareholders are one of the first things to be cut.

And the downward trend in their share prices gives me cause for concern. But energy prices have slipped back from their recent highs, which I’m sure is part of the reason. I don’t think oil and gas prices will go much lower in the short term, so perhaps,these three income stocks will soon stabilise.

Unfortunately, I don’t have any spare cash at the moment. But if I did, I’d seriously consider investing in at least one of them to boost my second income.

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.

James Beard 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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