Very high dividend yields can sometimes be a red flag. The yield might be high simply because the share price has fallen quickly. It could also be the case that a very high yield is unsustainable with the dividend per share likely to be cut. Yet sometimes a juicy yield projection on a dividend forecast can be for good reasons, with the risk-to-reward ratio stacking up nicely.
Here’s one to consider
Energean (LSE:ENOG) is an international hydrocarbon exploration and production company. Over the past year, the share price has fallen by a modest 4%. Yet the dividend yield sits at 8.28%, making it one of the highest yielding options in the entire FTSE 250.
The business is in a good position right now, with momentum from 2022. The full-year results from the spring showed that revenue jumped by 48% versus 2021. There was a positive swing of 118% in profit after tax, something that’s key to help boost the dividend payment.
Interestingly, the business commented that “it aims to provide a reliable and progressive dividend stream and is targeting to pay cumulative dividends of at least $1bn by the end of 2025.” Therefore, even though historically it has paid quarterly dividends of $0.30 per share, the dividend forecast for next year and 2025 increases.
An appealing dividend forecast
At the moment, analysts are forecasting that the quarterly $0.30 payment will continue through to the first quarter of next year. Yet starting with the Q2 payment, this is forecasted to rise to $0.56 per share. Throughout the rest of 2024 and 2025, this is due to remain at $0.56.
Putting this together, the 2024 full-year dividend payment should be $1.98 (£1.55). Using the current share price of 1,137p, this would give a yield of 13.63%. In 2025, the total dividend per share could be $2.24 (£1.76). Assuming the same share price, the yield would increase to 15.47%.
The big assumption here is what share price to use. If income investors get excited and pile into the stock, the share price will rise. This will act to decrease the yield, making it potentially less attractive. Yet even if this is the case, I still feel a yield of 10%+ is possible.
Mulling over the future
Only time will tell if the business is able to deliver on the ambitious dividend plans. It’s worth remembering that the $0.30 dividends only began to be paid in Q2 of 2022. So in terms of a track record, there isn’t a huge amount of history to go on. This is a risk that we need to think about before investing.
Ultimately, Energean isn’t a low-risk company. Yet with this kind of dividend forecast, I think investors should consider adding a small amount of the stock to an income portfolio.
