Dividend shares are a tricky beast to assess. On paper, a double-digit yield looks irresistible. But in reality, investors need to dig into the numbers before assuming that sky-high income is safe.
Recently, two stocks caught my eye: Serica Energy and Ithaca Energy. Both currently boast dividend yields above 10%. Normally, such high payouts are the result of a falling share price, but that’s not the case here. Serica’s climbed 55% over the past five years, while Ithaca’s rocketed an astonishing 99% in 2025 alone.
That begs the question – how are these shares maintaining yields above 10% while rallying so hard?
Trouble beneath the surface
Unfortunately, the answer isn’t encouraging. Despite their strong price performance, both Serica and Ithaca are unprofitable. Their earnings growth has plunged between 140% and 160% over the past year, leaving neither company with sufficient dividend coverage.
Ithaca at least generates decent free cash flow, which supports its payouts in the short term. But it also carries a hefty debt load. That means any dip in energy prices or operating cash flow could put the dividend at risk. Serica, meanwhile, looks even more stretched, with recent losses weighing heavily on its payout ability.
These examples highlight an important point: dividend yields above 10% often signal trouble. Even when share prices are climbing, unsustainable payouts can quickly unravel into dividend cuts.
A steadier dividend option
When I’m hunting for reliable dividend shares, I prefer businesses with strong margins, healthy balance sheets and payouts backed by consistent profits – even if that means accepting a lower yield.
One of my favourites right now is challenger bank OSB Group (LSE: OSB). It offers a range of financial services, including buy-to-let mortgages and loans for small businesses.
OSB’s dividend yield’s a more modest 6%, but it’s well-covered, with a payout ratio below 50% and cash coverage of 2.4 times. In other words, the company comfortably earns and generates enough cash to pay its dividends without over-extending itself.
The stock’s also up 37% in 2025, yet it still looks cheap with a price-to-earnings (P/E) ratio of just 8. Profitability’s solid too, with an 18% operating margin and a 12% return on equity (ROE).
That said, it’s not without risks. Over the past year, revenue and earnings growth have declined 7% and 28% respectively. For a small but growing business, it can be difficult to maintain meaningful market share in the UK financial sector. Fierce competition from rival banks is a threat to profits and could shake investor confidence.
Still, compared to the fragile payouts from Serica and Ithaca, OSB looks like a much more sustainable income play.
Key takeaways
Dividend shares with eye-popping double-digit yields may look tempting, but they’re often a trap. As Serica and Ithaca show, soaring share prices don’t always mean sustainable payouts.
For long-term passive income, I’d much rather own steady, profitable businesses operating in secure, well-established sectors. The yields may not make headlines, but in the world of dividends, boring reliability often wins the race.
For income investors looking to expand beyond the usual FTSE 100 stocks, I think OSB Group’s certainly one worth considering.
