A 12% yield? Here’s the dividend forecast for a hot income stock

Jon Smith considers a FTSE 250 income stock that has a clear dividend policy with the aim of paying out more, making it look attractive to him.

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Income stocks provide a great way for me to get cash without having to be super active in my investment activity. Naturally, if I can find a way for my money to generate a higher yield, I’m always interested in hearing it.

Of course, stocks with a high yield or a large dividend forecast do need to be treated carefully, as they could be high risk. Yet here’s one that has caught my eye recently.

Strong dividend policy

Energean (LSE:ENOG) is an international hydrocarbon exploration and production company, with a focus on natural gas. It’s a FTSE 250 stock that has fallen by a modest 6% over the past year.

What interests me is the dividend payments. The firm has a current dividend policy of “targeting to pay cumulative dividends of at least $1bn by the end of 2025”. It paid out $107m in 2022 and $214m in 2023. So even without looking at analysts’ dividend forecasts, it’s clear that more dividend payments are coming this year and next in order to try and hit the $1bn mark.

The business feels confident in hitting this goal. In the latest report, it spoke about having predictable cashflows. It also mentioned that it’s “largely insulated from commodity price fluctuation, thanks to
long-term gas contracts”
.

As a result, even though the nature of the sector is quite high risk, Energean should be able to provide me with reliable dividends going forward. Granted, this does need close monitoring. For example, if the company underperforms massively in the coming year, it might have to change its dividend policy.

Adding in the numbers

At the moment, the firm pays quarterly dividends of $0.30 per share. Using the current share price, this equates to a dividend yield of 8.16%. This is high, but isn’t so ridiculously high that I think that it’s unsustainable.

The expectation is for this to be raised to $0.45 per share going forward and into 2025. A run of four of these payments would give a total dividend of $1.80 per share over a year. If I assume the share price stays where it currently is, this would raise the dividend yield to 12.2%.

The assumption that the share price will stay the same might not be accurate. It could be higher or lower than currently, which would change the overall yield. Yet I do have to use some kind of price to get an indication.

Risk but high reward

Energean is a profitable and growing business that has a clear dividend policy. This makes it attractive enough to me to consider buying some stock. I acknowledge the high yield does make it high risk, which is why I think I’m going to start by investing a relatively small amount.

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.

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