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Much like the FTSE 100, the FTSE 250 has been teasing new highs this year. After smashing through its 2021 peak, the mid-cap index has now made a sustained move above 24,000 points for the first time.
Not every stock’s winning but strong earnings are keeping things afloat, particularly with expectations of further rate cuts. Energy, consumer discretionary and industrial names have led the charge, while some rate-sensitive property and financials have lagged.
Among the biggest beneficiaries has been Ithaca Energy (LSE:ITH), the North Sea oil and gas producer. It’s up 57.6% year to date. With oil prices firm and the company dedicated to shareholder returns, its appeal is undeniable for income investors hunting high-yielding dividend stocks.
But how sustainable is this rally, and are the risks acceptable for a long-term UK income portfolio?
A deeper dive into the numbers
Ithaca Energy is a pure-play North Sea operator, focused on producing oil and gas from assets around the UK Continental Shelf, including the large Mariner field. The company has a reputation for low-cost production and disciplined capital allocation, ensuring a fat chunk of profits flow back into dividends and buybacks.
For income investors, the numbers are hard to ignore with the forward dividend yield sitting at 9.72%, among the highest in the FTSE 250. Shareholders that reinvested all dividends for the past year would have enjoyed a total return of 74.5%.
That comes after several notable dividend hikes, with the latest interim payout rising 33.5% compared with the prior period.
Management has reaffirmed guidance to return 30% of post-tax cash flow from operations to shareholders in 2026, with total dividends expected to exceed $500m for the year. With £8.57bn in assets and only £888.45m in net debt, I don’t see any immediate financial threat to dividend payouts.
Plus, the stock doesn’t even look overvalued — which is surprising after the rally. The forward price-to-earnings (P/E) ratio is estimated at 13.8, below many peers and well under the index average.
But that doesn’t make it a screaming Buy. Let’s see what could go wrong.
A risky sector
Energy’s far from a stable sector these days. Oil prices remain volatile and heavily influenced by geopolitics and OPEC+ decisions. A sustained drop below $70 per barrel would pressure cash flow and could force a rethink on dividend guidance.
There’s also the UK’s windfall tax on energy profits. That caps profits, making it harder for Ithaca to fully benefit from price spikes.
So what does this all mean for long term investors? It’s far from a ‘set-and-forget’ investment, but does the low valuation and high yield justify the risks?
My verdict
Many stocks on the FTSE 250 are doing well right now and some certainly look more stable than Ithaca. But it’s hard to argue that such a high yield at a decent price isn’t attractive.
If you’re bullish on the outlook for oil and gas and want to diversify your energy exposure, it’s worth a closer look, in my opinion.
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Mark Hartley does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
