At 17%, this dividend stock has the highest yield on the FTSE 250

Grabbing high-yield stocks on the FTSE 250 is a great way to earn extra returns. But is the highest yield always the best choice?

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The FTSE 250 hosts a wide range of stocks that pay attractive dividends. The average yield is between 4% and 5% but some companies that are worth considering are offering significantly more.

Right now, Diversified Energy Company (LSE:DEC) is leading the charge with the highest yield on the index. The company produces and transports gas and oil deposits in the Appalachian region of the US, with a strong focus on sustainability. It currently rewards its shareholders with a massive 17% yield at the current share price. That equates to an extra £1.83 paid out to investors for every £10.80 share held.

Despite the generous yield, the company is comparatively small, with a £508.9m market cap and £683.3m in revenue last year. In its 2023 full-year results released in March this year, revenue and earnings were down 62% and 58% respectively, year on year.

And that’s the catch.

Due to a high debt load and earnings that are forecast to decline in coming years, it has voted to cut dividend payments. Starting next year, the yield will drop to only 8% per share, removing one of the key value propositions of the stock.

This shows why stocks with high dividend yields should be considered with caution.

Fortunately, there are many other stocks with a long history of not cutting dividends. The yields may not be as high, but in the long term, the consistent and reliable payments result in greater compound returns.

A solid, reliable payer

One such stock that I’m a particular fan of is City of London Investment Trust (LSE:CTY). Not least because it started life as a brewery! Such humble beginnings make it one of the most quintessentially British stocks on the market.

As the name suggests, it has now matured to become an investor in UK equities. Its top five largest holdings include BAE Systems, Shell, HSBC, RELX, and Unilever.

Over the past 10 years, dividend payments have increased consistently at a rate of 3.37% per year, without interruption. While the trust focuses on providing returns via dividends, the share price has enjoyed some decent growth too — climbing 125% in the past 20 years.

The FTSE 100 only returned 85% in the same period.

However, history also reveals the trust’s main weakness.

During times of economic crisis, it has fallen significantly. This can be seen in 2008 during the global financial crisis and again in 2020 because of Covid. During these periods, shareholders received a net negative return as the share price losses negated any dividend returns. This is because the trust doesn’t hold a significant amount of defensive stocks, focusing instead on dividends.

And if the fund’s managers make bad investment decisions, dividends could be cut. It hasn’t happened yet, but it can’t be ruled out.

Still, over 20 years it’s outpaced the FTSE 100 while paying a consistent dividend on top. If it continues to deliver the same returns, a £10,000 investment could grow to £26,000 in 10 years, paying an annual dividend of £1,616.

Sure, a stock with a 17% dividend yield might deliver higher returns one year, but it won’t be long before it’s cut.

I prefer something more reliable.

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.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in BAE Systems, HSBC Holdings, RELX, Shell Plc, and Unilever Plc. The Motley Fool UK has recommended BAE Systems, HSBC Holdings, RELX, and Unilever 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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