The 15% yield from this FTSE 250 dividend stock looks amazing. Is there a catch?

When a dividend stock offers a double-digit yield like this, is it time for us to rush out and try to snap up a big passive income?

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I like banks. And I like a nice dividend stock. So when I see Close Brothers Group (LSE: CBG) with a forecast 15% dividend yield, I can’t help but get excited.

The company’s in business banking, investment management, and various kinds of finance.

The Close Brothers share price had been slipping since 2021. And then in 2024, it looks like it fell off a cliff.

Too cheap now?

The fall has helped push the expected dividend yield up to that 15%. And the forecast price-to-earnings (P/E) ratio is now down around four.

That valuation is even lower than Barclays, and we all know what a loser that one is. Oh, hang on, no. Barclays faces big risks this year. But I think it might be the best long-term buy on the FTSE 100. Maybe even the whole stock market.

Still, when I see a dividend yield in double digits, a warning light flashes in my head. Yields that big usually only happen for bad reasons. And folks sell the shares when they just don’t think they’ll get the cash.

What’s wrong?

So what’s going wrong at Close Brothers? Forecasts still look good. They show rising earnings and a stable dividend for the next two years. But there are signs these could soon be downgraded.

A handful of brokers have already cut their outlook and price targets for the stock. When that happens, people tend to dump the shares. And that’s especially true when it’s in a sector under pressure in highly uncertain times.

There’s another thing too, as the 2023 dividend wasn’t covered by earnings. Those forecasts suggest we’ll see cover in 2024 and beyond. But I’d almost bet money on a downgrade putting that under threat too.

Downgrades

So why the likely downgrades? Well, it seems we might have a motor finance mis-selling thing about to break. At least, the Financial Conduct Authority (FCA) is sniffing into that area right now.

In fact, on its website, Close Brothers says: “The Financial Conduct Authority says some customers may have been charged too much on their vehicle finance before 2021“.

If there’s any compensation to be paid, a small company like this wouldn’t be able to shrug it off like one as big as Barclays might.

The verdict?

On the one hand, this sounds like it could be bad. But on the other, has the market overreacted? You know, the way it does when any hint of bad news wafts towards a bank or finance stock?

I can’t help thinking it might have. And that this stock might be worth buying for a long-term hold now. If I went for something like this, I’d only stump up a small amount of cash though.

I’ll also wait until I see the firm’s H1 results and what the board might say about this FCA thing, due on 19 March.

And even if I did buy, I wouldn’t put too much faith in getting that 15% dividend. Maybe a nice one, but not that big.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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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