This FTSE 350 dividend stock is yielding 12%, but is it a buy?

Daniel Moore has been a eying dividend stock with a 12% yield for his portfolio, but can that level of performance be maintained over the long term?

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Throughout the 2020 Covid-19 pandemic, retail investing and trading became a booming industry. In the low-interest and high fiscal stimulus environment, growth shares experienced euphoric levels of performance until rotations began to occur in early 2021. A dividend stock that capitalised on this retail expansion was CMC Markets (LSE: CMCX). CMC Markets operates a global leveraged (CFD) trading platform, as well as some non-leveraged brokerages services, geographically focused in Australia.

Success story

Prior to 2020, CMC had a very mediocre 2019. Turnover fell by 21.4% and pre-tax profit by 89.5% from £60.1m to just £6.3m. Things appeared to be on the decline for the business.

However, 2020 became, by a significant margin, their best year of trading to date. The combination of individuals’ cash sitting in essentially interest-free savings accounts, a lot of free time attributable to lockdowns and astonishing capital growth in technology companies fuelled a boom in retail trading globally. Pre-tax profit surged to £141.1m in the first half of its financial year to September 2020.

With skyrocketing fundamentals came incredible share price growth of more than 550% from April 2019 to April 2021. Things were certainly on the up. Consequently, the dividend paid to shareholders on 9 September 2021 of 21.43p per share was huge relative to the rest of the industry, at over 10%.

Growth becomes contraction

Due to the fact that CMC Market’s revenue is primarily derived from volatility within the financial markets, results fell slightly short in 2021, although they were still better than pre-pandemic levels.

The VIX (Volatility Index) cooled from a rating of 66 (very high) in March 2020 to just 20 at the beginning of 2021, indicating volume of trading within the financial markets was simmering down a notch compared with the pandemic-induced frenzy.

This direct correlation could be considered as an inherent risk of investing in a company like CMC, where returns will be influenced heavily by market conditions regardless of the firm’s individual successes. But in many ways, this can be said for the vast majority of listed organisations.

Looking to the future

Although CMC’s forecasted dividend payment has been reduced to just 3.50p, it has recently just launched a share buyback scheme of up to £30m. In addition to this the VIX index has risen over the past months to 32 due to the uncertainty regarding the global economic outcomes of Russia’s invasion of Ukraine. These events are unlikely to be a coincidence, and I suspect that CMC’s trading has been relatively strong as of late.

However, the retail investing landscape is not what it once was: inflation is biting the real disposable incomes of households that will surely be less willing to invest in a volatile market when they have large utility bills to pay.

For now, I’m going to sit on the fence regarding investment into CMC Markets, despite the lucrative operating margins and attractive dividend yields. I would think it wise to observe how the macroeconomic picture develops over the next month, particularly regarding the inflation metric determining real household income and just the general persistence of market volatility.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Daniel Moore 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.

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