Excessive dividend yields are very eye-catching. Nevertheless, excessive yields can generally be unsustainable, particularly if the dividend isn’t rising however the share price is falling. So after I noticed that there was a FTSE 250 inventory with a 13.66% yield, it undoubtedly warranted a better inspection.

A high-flyer

The corporate in query is Ithaca Vitality (LSE:ITH). The UK-based oil and gasoline firm inventory has fallen by 4% over the previous yr.

So far as enterprise operations go, it’s centered on exploration, growth, and manufacturing within the UK North Sea. By extracting crude oil and pure gasoline from its offshore fields, it makes cash by promoting the merchandise to refineries and gasoline distributors.

In contrast to some shares from this sector which are but to supply income, Ithaca has websites which are absolutely operational. This can be a key issue when contemplating it as a dividend share. In any case, if funds aren’t sturdy, dividends are often one of many first areas that get minimize to assist ease money circulate stress.

The most recent firm replace detailed a constructive outlook going ahead. The primary oil from the Talbot mission is anticipated earlier than year-end, with drilling on the Jocelyn South exploration effectively “offers immediate potential production if successful”. If these do come on-line, it might additional enhance income and filter down to the next dividend per share.

Dangers stay

The dividend coverage states that the administration group purpose to offer “annualised dividends of 15-30% of post-tax net cash from operating activities”. So, naturally, if operations do effectively and revenue will increase, the dividend will rise.

Nevertheless, this may be seen as a danger. Ithaca operates in a risky sector. Oil and gasoline costs transfer up and down sharply. It might drop based mostly on pure climate associated occasions, geopolitical tensions within the Center East and even demand from sectors like journey and tourism. None of those elements is inside Ithaca’s management. So if the costs drop later this yr, it might scale back income and in the end imply that the dividend falls.

One other danger is the share price. Vitality shares like Ithaca can leap round based mostly on hypothesis relating to future tasks. Which means if an investor buys now and sentiment round new tasks sours, the investor may very well be left holding a big unrealised loss from the share price, even when the dividend will get paid.

Threat versus reward

I feel that Ithaca is undoubtedly a high-risk, risky inventory. That is the case whether or not an investor is contemplating it for capital positive aspects or revenue. Nevertheless, the chance is balanced by the scale of the potential reward. A yield in extra of 13% is appreciable. After I examine it to the yield on different revenue paying belongings, it’s to not be ignored.

Subsequently, for an investor that’s pleased with the chance degree, I do suppose that that is price contemplating immediately.