As an income investor, I’m concerned about trying to maximise the dividends I receive. The more bang for my buck that I can get, the harder my investment is working. Obviously, I want to ensure that the shares I buy have sustainable payments over time. But if I wanted to increase my risk tolerance and just focus on the highest-yielding stocks right now, what should I be looking at?
A high yield, but some issues
Within the FTSE 250, Hammerson (LSE:HMSO) technically (more on that below) has the highest dividend yield at just over 10%.
Hammerson is classified as a real estate investment trust (REIT). This means that it invests and holds property in order to gain this classification. Some of the sites include Brent Cross in London, Grand Central in Birmingham and Victoria Quarter in Leeds. As of the end of last year, the portfolio was valued at £6.4bn.
REITs generally offer a high dividend yield. In order to be classified as a REIT, a company is required to distribute 90% of the income it generates to investors. Logically, dividend payments are often seen as the way to go.
I do need to be careful when stating that Hammerson has the highest dividend yield right now. This is because the last round of dividends was actually pushed towards a scrip dividend alternative. Investors could still receive a cash dividend, but it was only 0.2p per share. The enhanced dividend alternative of 2p per share was from being given newly issued shares. This alternative still counts as a dividend, but in the form of shares not cash.
In terms of the outlook for Hammerson, I’d be cautious. The share price is down heavily over the past year, largely due to Covid-19 closing sites and leading to a £1.7bn loss. Refinancing of debt and other issues are why I think the dividend alternative was suggested. The company, like many others, aimed to hold on to as much cash as it could. This goes against what I see as a sustainable dividend policy, so I would steer clear of the stock.
A slightly lower-yielding dividend stock
The second-highest dividend yield within the FTSE 250 is from Diversified Oil and Gas (LSE:DGOC). It does what the same suggests, and operates oil and gas wells in the United States.
Adjusted total revenue for 2020 came in 8% higher than the previous year, even with lower oil prices. Total cash expenses fell by 10%, allowing it to increase the dividend payout during the year. In fact, the dividend was raised in two consecutive quarters, meaning four payments were received by investors in total.
In comparison to Hammerson, I think this high-dividend-yield stock is more sustainable. With the dividend yield at 9.88%, it’s still very high, but I would say offers lower risk than the REIT.
The risk from DGOC is the nature of the industry it operates in. Any company that owns and operates oil and natural gas wells is at the mercy of mother nature. The unpredictability of resources in both existing and future projects is something I always need to be thinking about as a long-term investor.
Overall, Hammerson and DGOC are the two highest-yielding dividend stocks in the FTSE 250 right now. Personally, I’d prefer to buy DGOC over Hammerson for income.
jonathansmith1 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.