These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be sustainable or not.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Asian man drinking coffee at home and looking at his phone

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When it comes to evaluating a stock based on the dividend yield, I need to be careful. If I filtered FTSE 250 stocks from highest to lowest yield, it doesn’t make sense to close my eyes and just buy the three highest ones. This might sound odd to some income investors, but hear me out.

Breaking the bank

To highlight my point, I’m going to start with the second highest yielding stock in the index, Close Brothers (LSE:CBG). The current yield is 20.87%, with the share price down 66% over the past year.

The business has been struggling over the past couple of years. It had to take on impairments relating to loans with Novitas, the lender it bought several years ago. It also has suffered from weak performance from Winterflood, the trading and investment arm of the bank.

From just looking at the dividend yield, income investors might think it’s worth a small investment. However, the business has suspended the dividend.

The dividend yield calculation takes into account the dividend per share from the past year, not the coming year ahead. Therefore, I expect the yield for the next year to sit firmly at 0%.

The top of the tree

The highest yielding stock in the entire FTSE 250 is the Diversified Energy Company (LSE:DEC). The oil and gas company has seen a similar fall in the share price, down 53% over the last year. This has helped to push the dividend yield up to 28.99%.

In contrast to some other exploration companies, the business is revenue generating, with the latest Q3 2023 results showing an adjusted EBITDA profit margin of 52%. This means that it can afford to pay out dividends due to the profitability.

However, the volatility in the share price is the same as I’d expect for a penny stock oil exploration firm. Speculation around new projects can cause wild swings.

So even though the dividend here could continue to be paid out, investors needs to be aware that any dividend profit could be wiped out from the share price movement. On the other hand, investors that are comfortable with the high risk stand to benefit in a large way if the company does well.

Another exploration firm

Rounding out the top three is Ithaca Energy (LSE:ITH). Here’s another oil and gas firm, which only went public in November 2022. The stock over the past year is down 23%, but it boasts a dividend yield of 15.11%.

The business is profitable, while also carrying a low level of debt. Further, from the latest results, it has $912.6m of liquidity on hand. This should help in case it has to invest in bringing projects to fruition before they generate revenue.

A project with large potential is Rosebank. Ithaca has a stake in Rosebank, one of the UK’s largest untapped oil fields. Only time will tell what this could yield the firm, but if profits are reaped in years to come, dividend payments should follow.

Of the three options, I think Ithaca is the most likely stock I’d buy for sustainable income. I believe the other two options are too high risk.

Yet even with Ithaca, I’d only look to put a small amount of money to work here.

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.

Jon Smith 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.

More on Dividend Shares

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

433 shares in this FTSE 100 dividend superstar could make me £18,803 in annual passive income!

This overlooked FTSE 100 gem has one of the best yields in the index, looks undervalued, and makes me big…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

If I’d put £5,000 into Santander shares 1 year ago, here’s how much I’d have now

Santander shares have outperformed over the past 12 months, leaving this Fool wondering if he should add the bank stock…

Read more »

UK money in a Jar on a background
Investing Articles

Here’s how I’d invest £10 a week to aim for £191 a month in passive income

Stephen Wright outlines how he’d invest in dividend growth stocks over a long time to aim for significant passive income…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the Aviva share price

Even after the turnaround of the past few years, the Aviva share price doesn't seem to want to move very…

Read more »

Close-up of British bank notes
Investing Articles

Here’s how I’d target £130 per week in dividends from a Stocks and Shares ISA

Using a Stocks and Shares ISA as a dividend machine does not have to be hard work. Our writer explains…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Down 6% in 2 weeks, the Lloyds share price is in reverse

After hitting a one-year high on 8 April, the Lloyds share price has suddenly reversed course. But as a long-term…

Read more »

Investing Articles

£3,000 in savings? Here’s how I’d use that to start earning a monthly passive income

Our writer digs into the details of how spending a few thousand pounds on dividend shares now could help him…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil's increasingly seen as evil. But BP's a cash…

Read more »