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In the hunt for yield via dividend stocks, investors need to use caution. Sure, the higher the yield the more bang we get for our buck. But it’s important to appreciate whether the dividend forecast is robust to ensure income could get paid for the coming years. Here’s a FTSE 250 stock with very high potential, but it also comes with high risk.
Let’s get down to business
The company I’m referring to is Vanquis Banking Group (LSE:VANQ). The British bank focuses on retail customers, offering credit cards and related services. Over the past year, the stock is down 37%, helping push up the dividend yield to 12.81%. At this level, it’s one of the highest-yielding shares in the FTSE 250.
The stock dived at the end of July following some poor results. For H1 2023, the loss before tax was £14.5m. This compares to a profit of £46.9m from the same period last year.
Much of the 37% loss over the past year can be accounted for in the fall over the past few weeks since the results came out.
However, with the results, the management team confirmed that the dividend per share would remain the same, at 5p.
What the forecast looks like
The bank pays two dividends a year, the smaller one being from the half-year results. The larger one comes after the full-year results in Q1.
At the start of the year, the dividend forecast was for a 13p and a 5.5p dividend, to total 18.5p. As it happens, it was 10.3p and 5p, totalling 15.3p. Using the share price of 119.4p gives us the 12.81% yield.
Currently, the forecast for 2024 is for an 8p and a 5.5p dividend, or an annual dividend of 13.5p. For 2025, This rises to 11.7p and 6.5p, all-in being 18.2p.
If I assume the same share price of 119.4p, then the yield next year could be 11.3% and for 2025 it could be 15.24%.
Weighing up the probability
Even though the forecasts aren’t wildly out of the realms of probability, I’m a little sceptical about the yield potential. Naturally, we don’t know where the share price is going to be in the coming years. So basing the yield on the current price is unfortunately flawed to some extent.
If the struggles at the company continue, then the share price could fall even further. Even though this would push the yield higher, I think this is bad news. This is because continued poor performance will likely see the dividend cut. It would need to do this to preserve cash flow.
Therefore, I’m not saying that the yield won’t stay above 10% in the near future. The next dividend per share won’t be confirmed until early 2024. Yet do I feel income investors should be very careful when considering whether to buy this stock or not? Absolutely!