18% per annum: is this dividend stock too good to turn down?

Jon Smith scratches his head over a dividend stock that has a very high yield, but appears to be that way for a particular reason.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Chalkboard representation of risk versus reward on a pair of scales

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At a general level, the dividend yield of a stock is related to the risk it carries. A stock with a 2% yield usually has a lower risk of the income being cut than a stock with a 10% yield.

Of course, there are exceptions to every rule. So when I spotted a dividend stock with an 18% yield, it caught my interest.

Details of the firm

I’m talking about VPC Specialty Lending Investments (LSE:VSL). It’s rather a mouthful to say, although the name does give a good indication about what the company does. It makes credit investments, lending out money in niche areas such as small business lending, working capital products, consumer finance and real estate.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

Due to lending to some more unusual areas of the market, it can often charge higher rates of interest. The profit generated from this, alongside other business operations, provides it with money it can use to pay out as a dividend to shareholders.

It typically pays out four dividends a year. Over the past 12 months, it’s been 2p a quarter. When I add this up and compare it to the current share price, I get a dividend yield figure of 17.84%. This is clearly an ultra-high-yield stock!

Created with Highcharts 11.4.3Vpc Specialty Lending Investments Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

A big disconnect

Digging into the business further, I can see why the yield is so high. The share price has fallen by 44% over the past year. This has acted to push the yield up and up.

The company blamed several factors during the 2023 annual report. This ranged from the impact of inflation to high interest rates that put pressure on businesses. It also flagged up that the share price is trading at a large discount to the actual net asset value (NAV) of the investment in the portfolio. This is true, in fact it’s currently at a 43% discount.

In my experience, such a large disconnect usually occurs due to negative investor sentiment. If they believe the company’s unlikely to do well in the future, they might sell the stock despite it being lower than where it should be in theory (on par with the NAV).

This is a bit of a red flag to me when I’m considering whether to buy the stock.

Too much for me

With a market-cap of £126m, VPC isn’t a huge listed company. It’s not a penny stock, but it’s not far away. The risk that’s associated with buying a stock of this size for income is very high. My concern is that the high yield is being driven mostly by the share price fall over the past year. Therefore, I don’t feel it’s massively sustainable as a long-term investor.

I could be wrong, with the share price eventually returning to a fairer level that’s more in line with the NAV. If I bought now and that did occur, I’d be laughing as I’d lock in the yield but also benefit from my capital appreciation!

Ultimately, I think this is a high-risk play. It’s not to say it won’t work out well, but I think I’ll look for some lower-risk options at the moment.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

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.

Jon Smith 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.

More on Dividend Shares

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Dividend investors! Here’s what Warren Buffett says builds wealth in the stock market

Reinvesting dividends at yields of 8% or higher looks like a good way of building wealth. But Warren Buffett has…

Read more »

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »