Diversified Energy Company (LSE:DEC) is a FTSE 250 stock that’s currently yielding an amazing 14%. This level of passive income is hugely appealing to me.
Part of the reason for this impressive yield is a 40% drop in its share price over the past six months (7% since March last year). In August 2022, it reached an all-time high of 140p. Now the shares change hands for just over 100p. But, even at their peak, they were still yielding 10%.
The company owns and operates gas and oil fields in the US. It has therefore been a big beneficiary of the dramatic increase in energy prices over the past year. But, it’s also producing more year on year.
To continue its expansion, the company is always on the lookout for more fields. Indeed, it recently agreed a $250m deal to buy multiple sites adjacent to its existing assets. To help fund the purchase, the company undertook a rights issue and raised £134.9m at 105p per share. This week, the last of the new shares were admitted to trading.
The decline in the share price probably reflects the recent easing of energy prices. In my opinion, there doesn’t seem to be anything fundamentally wrong with the company. Despite its continuing growth, borrowings remain under control. And inflation isn’t impacting the company’s costs too badly.
Dividends galore
But it’s the dividend that most attracts me to Diversified Energy. As the table below shows, the company has a history of increasing its payout to shareholders.
|
Quarterly dividend (cents per share)
|
2018
|
2019
|
2020
|
2021
|
2022
|
|
Q1
|
1.73
|
3.42
|
3.50
|
4.00
|
4.25
|
|
Q2
|
2.80
|
3.50
|
3.75
|
4.00
|
4.25
|
|
Q3
|
3.30
|
3.50
|
4.00
|
4.25
|
4.38
|
|
Q4
|
3.40
|
3.50
|
4.00
|
4.25
|
4.38
|
|
Total
|
11.23
|
13.92
|
15.25
|
16.50
|
17.26
|
The Q4 2022 dividend has not yet been declared and has been estimated above
The total dividend for 2022 is likely to be 17.26 cents per share. At current exchange rates, this equates to 14.33p.
Passive income
To generate £1,000 a year, I’d need to buy 6,978 shares at a cost (excluding stamp duty) of £7,153. Unfortunately, I don’t have that kind of money right now.
Instead, I could buy 45 shares weekly for three years.
This strategy would currently cost me £46 each week. But the stock price is unlikely to remain static over this period. However, I could use the passive income generated to buy more shares. This would offset some of the additional cost should the share price rise. I might also get to my target quicker, at a lower cost.
At current prices, after one year, I could have generated enough income to buy another 320 shares.
A word of caution
It’s worth remembering a dividend is never guaranteed. And the past isn’t necessarily a good guide to the future. Should earnings fall, the directors of Diversified Energy may decide to cut the payout. However, given the company’s recent track record of strong cash generation, I believe the dividend is secure for now.
Also, I’m aware the yield will be influenced by the dollar/sterling exchange rate. This is because the dividend is declared in dollars, but the shares are quoted in sterling. The US economy should grow this year whereas the UK could enter a recession. Therefore, in my view, it’s unlikely the dollar will fall significantly from its current level.
With the end of the tax year approaching, it’s time to review my finances. As part of this, I’ll consider adding shares in Diversified Energy to my long-term portfolio.
The post I’d buy 45 shares a week of this high-yield stock for £1k a year in passive income appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
