Only 1 FTSE 250 stock pays a 31% yield!

This FTSE 250 stock offer a 31% yield with little sign of slashing payouts. Could this be a slam-dunk buy for passive income?

| More on:
Two white male workmen working on site at an oil rig

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.

A 31% dividend? That’s the top end of FTSE 250 dividend yields right now. 

It’s hard to ignore a yield that might return your initial stake in less than three years – and could hand you a 10 times return in less than nine years. 

Such big yields can be a smoking gun, but this stock isn’t on the cusp of slashing its payout. Is it a buy? Let’s take a look.

Jump out

The stock in question is Diversified Energy (LSE: DEC)  – an Alabama-headquartered oil and gas company listed both in the States and over here. 

A few things jump out straight away. 

There’s the eye-catching 30.6% dividend yield, of course. Only four other FTSE 250 stocks offer above 10% to shareholders. 

The £468m market value makes it one of the smallest firms on the index too. Any drop in share price and it could be booted out. 

Lastly, the stock is cratering – down 55% in the last year. This drop will have pushed the yield up and is probably the key detail here. 


So why have investors been fleeing the stock?

Well, Diversified’s business model is squeezing the last drops out of ageing, and therefore cheap, oil wells. 

The practice has landed the firm in a bit of hot water. Its vast portfolio of 65,000 wells needs to be clean up and plugged at the end of their lifespan.

The Democrats are after them. They claim the firm is leaving billions of dollars of clean-up costs to the state governments. 

Snowcap Research shorted the stock after publishing a 39-page report claiming the firm had underestimated these costs. Total short interest is up five times since December. 

Diversified’s own reporting gives a $22,000 average cost per retirement. Other sources cost it at over $100,000. 

In amongst this fiasco, the business is going great guns. 50% EBITDA margins, industry-leading decline rates and net debt to EBITDA of 2.4x all look attractive. 

As for that dividend, the firm wants to pivot to buybacks, saying the share price, “does not reflect the quality of assets nor the significant opportunities for the long-term strategy”.

24% yield?

The forecast dividend yield is 24.2% although I’d say there’s too much uncertainty here to rely on that figure. 

And the uncertainty is what will guide my own decision here. How much will the well clear up cost? What kind of regulatory risk could we be looking at?

The threat here is not just to a couple of years of dividends either, it’s to the entire business itself. What if it’s simply not cost-effective to buy these older wells?

Without solid answers to these questions, I won’t be investing myself.

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.

John Fieldsend 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 Investing Articles

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Would a stock market crash matter?

Christopher Ruane explains why a stock market crash could turn out to be positive, not negative, for a private investor…

Read more »

Investing Articles

Has the Rolls-Royce share price peaked?

After a strong 2023 performance and (so far) in 2024, the Rolls-Royce share price has stuttered in recent days. Christopher…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Turning a £20k ISA into a £13,900 yearly second income? It’s possible!

By investing a £20k ISA now using certain basic principles, our writer thinks he could set up a second income…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With no savings, I’d follow Warren Buffett’s number one rule to build wealth

Can this one piece of Warren Buffett wisdom really help our writer as he aims to build wealth in the…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

A second income of £1k a month from just £10 a day! How would I do that?

Mark David Hartley considers how to build a second income stream starting from just £10 a day. Is £1,000 a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Turn £8,900 into a £24k annual passive income? Here’s how!

Christopher Ruane applies some investing lessons from billionaire Warren Buffett when explaining how he'd aim to earn sizeable passive income…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

7%+ dividend yields! 4 FTSE 100 shares for investors to consider buying in April

These FTSE shares offer dividend yields comfortably above the index average of 3.7%. Here's why they could be good passive…

Read more »

Dividend Shares

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an…

Read more »