Why I’d still buy this 24%-yielding passive income stock today!
A high-yielding stock doesn’t necessarily make it a good passive income investment.
Concerns about a company’s prospects will drive its share price lower. But if it maintains its dividend, its yield will go up.
However, if doubts about the viability of the business persist, the stock could become a value trap — one that’s over-priced but masquerading as a bargain.
I suspect many investors are currently considering whether Diversified Energy Company (LSE:DEC) meets this definition.
That’s because its yield of 24% is the highest in the FTSE 250.
And since 18 December 2023, its shares are down 14%.
Serious allegations
That was the day on which four members of the United States House of Representatives Committee on Energy and Commerce published a letter outlining concerns about the company’s accounting policies and environmental credentials.
DEC buys existing gas and oil fields, and seeks to extend their useful economic lives. It claims this policy is better for the environment — and cheaper — than drilling new ones.
But the letter claims it “may be vastly underestimating well clean-up costs“.
Also, although they acknowledge they’re lawful, it’s noted that agreements with certain states allow the company to defer up to $2bn of environmental liabilities.
This is said to enable DEC to give “the appearance of profitability on paper“, allowing it to pay “hundreds of millions of dollars” to shareholders. But it’s said to be leaving it with insufficient funds to clean up the wells when required to do so.
The taxpayer would then be expected to pick up the bill.
The company includes an estimate of the cost of its asset retirement obligations on its balance sheet.
At 30 June 2023, these were forecast to be $453m — equivalent to approximately 17% of the carrying value of its wells.
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