Stocks that pay dividends are a good way for me to make passive income. There are different levels of risk involved depending on the dividend yield. Usually, the higher the yield, the more risky it is to rely on the stock for sustainable income. Yet there are always exceptions to the rule. Here are a couple of ideas I’m weighing up at the moment.
Income is in the name
TwentyFour Income Fund (LSE:TFIF) currently has a yield of 10.15%. The FTSE 250 investment trust looks attractive, with the share price also up 3% over the past year.
Straight away, the fact that the yield is high without having a sharp fall in the share price is a good sign to me. If the share price has dropped significantly, it can push up the dividend yield, but this is unsustainable.
The income fund says it “targets less liquid, higher yielding UK and European asset backed securities”. In other words, it buys bonds, collateralised loans and other similar things that it believes are undervalued. In theory, it can earn a high level of income from such products, which it then pays out to investors.
I like the stock because a key objective is to generate income from dividends for investors. Further, because a lot of the securities bought have a floating interest rate attached, it has benefitted from the rise in interest rates over the past year. This is one of the reasons why the share price hasn’t taken a hit.
A key risk to note is the illiquid nature of the bonds and other loans the managers buy. This means they aren’t frequently traded. So if the fund manager urgently needed to sell something, it could really struggle to do so.
Look who’s back in town
The second high-yield option is Ithaca Energy (LSE:ITH). The business is also currently listed on the FTSE 250. It was previously on the AIM market but was bought out in 2017. It went public again in 2022.
This means there isn’t a huge amount of public financial history about the oil and gas firm. Although this is a risk due to a lack of dividend track record, the current yield of 14.25% is certainly eye-catching.
The share price is down 13% over the past year, but this doesn’t bother me too much. Commodity stocks like Ithaca are known to be volatile. When I look at the share price movements, it does have sharp spikes and troughs.
What I am bothered about is the financial results. From this angle, the picture looks strong. For the first nine months of 2023, adjusted EBITDA was down slightly at $1.37bn. However, available liquidity jumped from $399.4m in 2022 to $912.6m. Adjusted net debt to adjusted earnings fell to a low level of just 0.37 times.
These figures lead me to believe the dividends are sustainable going forward. I’ve got both stocks on my watchlist to consider buying when I have free funds.
