For investors building a passive income portfolio, it’s important to focus on sustainability over high yields. Typically, this means manageable debt, decent cash coverage and long-term earnings visibility.
However, that doesn’t mean every high-yielder should be disregarded. A few sufficiently sustainable high-yielders can give an average return that little boost it needs.
Harbour Energy
With a dividend yield of 8.83%, Harbour Energy (LSE:HBR) immediately stands out for consideration for anyone seeking chunky passive income. With three consecutive years of dividend growth and cash coverage running at around 10 times the payout, the distributions are well supported by underlying cash generation.
A forward price-to-earnings (P/E) ratio of 7.8 also suggests the shares may be undervalued relative to expected earnings, providing a margin of safety and potential for growth alongside the income stream. For passive income investors, that mix of high yield/dividend growth and apparently cheap valuation is attractive.
However, earnings have slumped by over 300% year on year. While not entirely unusual for cyclical energy stocks, it’s still concerning. If cash is needed to fund operations or service debt, dividends could be cut.
Speedy Hire
Speedy Hire offers a dividend yield just under 8%, making it another potential candidate for investors prioritising income. The company has an impressive 36-year record of uninterrupted dividend payments, which indicates a strong cultural and strategic commitment to rewarding shareholders.
Dividends are currently covered 6.6 times by cash flow, suggesting plenty of room for the growth even in tougher trading conditions. That level of cash coverage helps offset concerns around present unprofitability and a negative return on equity (ROE) of about -7%. High debt also threatens the dividend if earnings deteriorate further.
Still, the combination of long-term payment consistency and strong cash backing makes it worth considering for passive income investors comfortable with turnaround risk.
Ithaca Energy
Ithaca Energy (LSE:ITH) looks appealing on several fronts for income seekers, not least its eye-catching 12% dividend yield. Revenue’s grown an impressive 63% year on year, showing the business is still expanding at the top line despite sector volatility. The share price has also climbed 46.8% over the past year, which signals improving market confidence and has already delivered solid total returns to existing shareholders.
In addition, the company sits on almost £2bn of equity. This gives it a sizeable capital base that can support ongoing operations and investment. Together, this makes it a potentially powerful passive income vehicle, with scope for high payouts and growth if momentum continues.
However, the company’s currently unprofitable. Management already cut the dividend by 47% last year as cash coverage tightened to around 2.5 times. If earnings don’t recover, further cuts are possible as the company prioritises balance sheet strength and reinvestment needs over shareholder distributions.
As a result, Ithaca may be one to think about for investors willing to accept elevated risk in exchange for a very high, but less certain, income stream.
The bottom line
For investors building a passive income portfolio for retirement, reliability’s key. I typically aim for yields in the 5%-7% range.
But being too conservative can lead to suboptimal returns in the long-run. Locking in and reinvesting meaty dividends when the opportunity arises can help supercharge portfolio growth through compounding.
