The London Stock Exchange is filled with high dividend yield opportunities. And even after enjoying quite an impressive rally, plenty of income stocks continue to offer impressive payouts just waiting to be snapped up by investors. And right now, it’s possible to lock in some impressive double-digit yields from stocks trading at significant discounts.
So, what are the biggest opportunities I think are out there for income investors to consider right now?
Top 10 income stocks
In order of dividend yield, here are the largest payouts in the FTSE 350 that make me think they’re worth investors researching further.
- Ithaca Energy (LSE:ITH) – 16.75%
- NextEnergy Solar Fund – 10.76%
- Energean – 10.27%
- SDCL Energy Efficiency Income Trust – 10.25%
- Phoenix Group Holdings – 10.24%
- M&G – 9.73%
- TwentyFour Income Fund – 9.47%
- Legal & General – 9.27%
- Abrdn – 9.25%
- British American Tobacco – 8.77%
It doesn’t take more than a quick glance to notice a lot of the income opportunities lie within the energy and financial services sector. Both industries are being riddled with uncertainty right now. The oil & gas sector is tackling supply chain terrors from the ongoing and horrendous conflicts in Ukraine and Gaza. Meanwhile, insurance and investment companies are at the mercy of interest rate fluctuations.
However, it’s not exactly a secret that by capitalising on unloved companies, tremendous returns can potentially be unlocked. After all, that’s often where some of the biggest bargains can be found.
So, is now the time to start thinking about snapping up these businesses while they’re still cheap? Not necessarily. Let’s take a closer look at the current pack leader, Ithaca Energy.
Risk vs reward
Despite not being as well known as other oil & gas giants, Ithaca is actually one of the largest producers operating within the North Sea. And thanks to a recently signed deal with Eni, the company is on track to start producing up to 150,000 barrels of oil & equivalents per day by 2030. For reference, BP’s current output from this region sits at 200,000 barrels, putting Ithaca on track to be a fierce North Sea competitor.
With the firm’s medium-term production output seemingly set in stone, management feels comfortable enough to return $500m of dividends to shareholders in 2024 and 2025, fuelling the stock’s impressive 16.8% dividend yield. But if that’s the case, why haven’t investors been rushing to buy its shares?
The problem is a looming risk of equity dilution. Acquiring Eni’s oil & gas assets is going to require quite a bit of capital. And with debt being quite expensive right now, that likely means a whole bunch of new shares are likely to be issued, sending the stock price firmly in the wrong direction.
At the same time, the UK windfall taxes on energy companies are expected to take quite a toll on earnings in the current tax year. And profitability could come under further pressure if unforeseen complications emerge during the integration process.
In other words, Ithaca’s yield appears to be high due to high levels of uncertainty. If the company manages to defy expectations, opportunistic investors could reap tremendous returns. But the opposite is also true. And should the worst come to pass, a 16.8% yield may quickly evaporate.
Therefore, when exploring high-yield opportunities, investors must consider the risks attached to an investment. Otherwise, it’s easy to tumble into an income trap.
