At 14.5%, is this share a high-yield bargain?

Income is one of the reasons I invest. High-yielding stocks can offer some good dividend opportunities. For example, Henderson Far East Income has paid 9.1% yield at the moment. So if I bought £1,000 worth of shares today, I would expect a passive income of £91 a year.

That has been a great return. But it pales in comparison to Energy Diversification (LSE: DEC). Last week, the company announced its final dividend for the final year. Diversified Corporation pays a 17% dividend per share and an annual dividend yield of 14.5%.

Should I take it for my portfolio?

An innovative business model

Diversified buys old gas and oil wells. If they can do that cheaply but still pump gas from them for years or even decades, they can get a cheap source of energy that they can sell at market prices.

The company is developing a business model that has great potential. It recently spent more than half a billion dollars on acquisitions.

This also increases the well retirement rate. The potential cost of doing that in the Estate of more than 60,000 wells is a risk to the business model and the company’s profits. So I see it as positive news that Diversified has retired hundreds of wells”with responsibility and efficient” using his own words.

Juicy dividends

The business has consistently raised its annual dividend in recent years and has produced outstanding returns. But does the business model show that it can continue?

One risk is the drop in energy prices. I think that will hurt both profit and profit for the firm.

But another risk is the company’s ability to fund dividends. Last year, the net loss ballooned to $620m. Negative cash flow of about $5m, after distributing $143m to shareholders in dividends.

Corporate financing is complicated. Last year, for example, it paid off $2.1bn in loans with one hand, but borrowed another $2.6bn with the other.

So, even though the company posted huge losses last year, the fact is that the dividend is almost entirely supported by free cash flow. That shows that it can continue at the same level or increase again, if the cash flow remains strong. Then again, that cash flow partly reflects the company’s enthusiastic borrowing.

High yield, with risk

However, whether cash flow will remain high remains to be seen.

Lower energy costs can mean less money coming in. The company has a lot of loans, which increases its cash flow. Net debt last year rose from $1.0bn to $1.4bn. With interest rates rising, borrowing may become more expensive over time.

I think Diversified has an attractive business model and in recent years has been paying dividends to shareholders. But I doubt that high yields are possible in the long term, especially if energy prices collapse. I will not buy stocks for my portfolio.