Many FTSE 250 shares offer attractive dividend yields. By my count, five companies in the mid-cap index currently boast double-digit yields.
However, one FTSE 250 stock stands head and shoulders above the rest. I’m talking about Diversified Energy Company (LSE:DEC). This natural gas production business is the largest owner of oil and gas wells in the US.
So should investors consider buying its shares or is the 30.8% dividend yield a warning sign?
Dividends galore
The next quarterly dividend per share is expected to be around 0.7p. That looks like a very tasty reward against today’s share price of £9.35.
But time is of the essence. The stock’s ex-dividend date falls on 29 February. Accordingly, investors who want to receive the next cash payout have to buy shares before this date.
Moreover, shareholders will be entitled to make a unique choice regarding the total planned capital return of $43m.
Either they can receive their payouts as usual, or they can waive some or all of the dividend to have their shares bought back in a tender offer for a premium price.
In a revealing statement, the board said it believes today’s share price “does not reflect the quality of the company’s assets nor the significant opportunities for the company’s long-term strategy… the repurchase of shares is a prudent use of capital for the company and is in the best interests of the shareholders“.
Political trouble and short selling
That’s worth exploring further. Indeed, the reason behind today’s mammoth yield is a painful fall in the Diversified Energy Company share price.
The stock’s down 56% over 12 months and it’s fallen 22% this year alone.
One reason behind the plummeting share price is a congressional inquiry by House Democrats into the company’s methane emissions. The politicians have queried whether the business has sufficient funds for the remediation costs involved in plugging and cleaning up its wells.
Diversified Energy Company has also recently been subjected to a short seller attack by activist investment firm Snowcap Research. The ESG-focused outfit has criticised the FTSE 250 company’s production decline rate and cash flow reporting methodology. It also claims a dividend cut could be imminent.
A rare passive income opportunity?
Opportunities like this rarely arise among FTSE 100 or FTSE 250 shares. I’ve never seen a UK stock’s yield rise to such high levels. There’s a clear risk Diversified Energy Company could trim payouts in the future.
Although the attacks levelled against the firm appear to have politically-motivated elements, they’re still highly concerning.
Furthermore, Investec analysts recently expressed worries over the balance sheet, highlighting the need for asset sales to fund the chunky dividend. That said, the firm did shed $200m in assets earlier this year, reducing net debt by 12%.
It’s not all gloomy either. In a recent trading statement the company confirmed EBITDA growth to record levels with 51% adjusted EBITDA margins. Plus, a forward price-to-earnings (P/E) ratio below 7.5 looks tempting.
Overall, I have major concerns about the potential long-term clean-up costs, but if the company’s correct, those criticisms are unfounded.
Brave investors could consider Diversified Energy Company shares for what might be a once-in-a-lifetime passive income opportunity, but remain alert to the considerable risks the firm potentially faces.