There’s one FTSE 250 passive income stock that’s currently yielding 28%.
However, given the recent share price performance of Diversified Energy Company (LSE:DEC), it’s easy to think it’s stuck in some sort of doom loop, where negative events feed off one another, and send the stock lower.
The company says it’s ‘business as usual’ for its portfolio of 70,000 gas and oil fields in America. In my view, the directors are clearly indicating that they have every intention of maintaining the dividend at its current level.
And if the payout remains at $3.79 a share (£2.98 at current exchange rates), and the share price continues to fall, the yield will climb higher.
Yet the stock could be a value trap. Something that looks like a bargain but, in fact, is the opposite.
Serious allegations
On 18 December 2023, the company received a letter from four members of the US House of Representatives Committee on Energy and Commerce, claiming that it “may be vastly underestimating well clean-up costs“.
The company issued a robust response explaining that its financial statements are subject to audit by PricewaterhouseCoopers, and that reports about its poor environmental credentials are “not accurate“.
I approached Diversified Energy Company for further comment. The Senior Vice-President of Investor Relations and Corporate Communications explained that the letter was sent by only a minority of the 52 members of the committee.
He also emphasised that there was no formal investigation under way, only a request for further information.
Another problem
On 24 January 2024, the company blamed the downward pressure on its share price on short sellers.
Latest figures reveal that 1.69% of its shares have been borrowed in the hope that their value will fall further.
Reasons to be optimistic
Despite all the turmoil, if I had some spare cash I’d still invest in the company. As Warren Buffett famously advised: “Be fearful when others are greedy … be greedy only when others are fearful“.
It hedges the selling price of over 80% of its production. This guarantees that it has sufficient revenue to service its debt and pay a generous dividend.
Although its borrowings are on the high side, the company monitors its gearing closely.
On 2 January 2024, it sold assets for $200m. The proceeds were used to reduce its net debt by approximately 12%.
In my view, its unique business model of buying existing wells, rather than drilling new ones, is better for the environment.
I also like the way it seeks to extend the useful lives of its assets by implementing technological improvements.
And the firm has prepared a financial model to show that it has sufficient cash to retire all of its wells — at current values plus inflation — and repay all of its debt.
What next?
Diversified Energy Company is due to release its year-end trading statement shortly.
If it contains positive statements about the company’s performance — and further reassurance concerning its well clean-up costs — I think it will help its share price move higher. That’s because investors will be more confident that the current level of dividend is sustainable.
Otherwise, I fear it’s stock price will fail to escape its current doom loop, and fall further.
Either way, I don’t think the 28% yield will be available for much longer.
