We have some exciting news to share! The Motley Fool UK has now become The Twelfth Magpie -- an independent, UK-owned company, led by our long-serving UK management team — Mark Rogers, Chris Nials and Heather Adlington. In practical terms, it’s the same team you know, now fully focused on serving our UK readers and members.

Just as importantly, our approach remains unchanged: long-term, jargon-free, and on your side. This site is our new home, and there will be extra tweaks made across the coming few days as we settle in. So if anything looks a little off, please bear with us!

Here’s how 44,248 shares of this UK dividend stock generate a £10,000 annual passive income

Zaven Boyrazian takes a closer look at one of the highest yielding dividend stocks in the FTSE 250 and explains why it comes with a serious risk warning.

| More on:
Red lorry on M1 motorway in motion near London

Image source: Getty Images

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.

Some income investors prefer investing in steady and predictable dividend stocks, often from blue-chip FTSE 100 businesses. But for those willing to venture off the beaten track, extraordinary income opportunities do exist. And right now, Ithaca Energy (LSE:ITH) may be one of them.

XXX

This North Sea oil & gas producer is currently offering a staggeringly high 8.2% dividend yield, which isn’t only covered by cash flows but also has a surprisingly low payout ratio of just 58%.

With each share currently paying out 22.6p in dividends, if I were to buy 44,248 shares today, I could instantly start earning a seemingly secure £10,000 income stream. Sadly, I don’t have the £122,000 this trade would need. But there’s nothing stopping me from steadily buying shares over time to eventually build to this position.

The question is, is Ithaca actually a good investment? Or is the impressive yield too good to be true?

A North Sea powerhouse

Ithaca Energy’s one of the North Sea’s largest independent oil and gas operators, with a sprawling portfolio of producing assets across the UK Continental Shelf.

Following a transformative acquisition in 2024, the business now generates formidable cash flows. In 2025, underlying cash earnings hit $2.0bn, up from $1.4bn the previous year. And even after covering all its capital expenditures, there was still roughly $683m of free cash flow left to cover shareholder payouts.

As a result, gross dividends were hiked by 37.7% last year, from $363m to $500m, boosting the yield to 8.2% even with the share price more than doubling over the last 12 months. And now that oil & gas prices are once again on the rise due to the war in Iran, Ithaca’s profits and, in turn dividends, could once again be on track for an impressive 2026.

But make no mistake, there’s a reason why more investors aren’t taking advantage of this seemingly massive payout.

Why the risk is real

Every element of Ithaca’s cash generation is tied directly to the price of crude oil and natural gas. As previously mentioned, both of these commodities are currently climbing due to a global supply shock. But if the hostilities in the Middle East ease, today’s elevated prices could quickly reverse.

If Ithaca and other producers ramp up production too fast to take advantage of these higher prices, the supply shortage could suddenly flip to a supply glut, sending oil & gas earnings in the wrong direction.

At the same time, UK North Sea producers face specific structural challenges. The UK government’s Energy Profits Levy has meaningfully raised the effective tax rate for operators in the region, making future investment near impossible.

As such, the long-term production trajectory for Ithaca remains shrouded in uncertainty – the complete opposite of most mature dividend stocks.

So where does that leave investors today?

The bottom line

All things considered, Ithaca, while offering a lucrative income opportunity, doesn’t tickle my fancy. The core business appears to be well run. But with regulatory, geopolitical, and government headwinds pressuring the business, today’s impressive cash flows could quickly invert.

For more adventurous investors, there may be a unique opportunity here. But for my income portfolio, I think there are other more promising dividend stocks to consider.

Zaven Boyrazian 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 Investing Articles

Friends and sisters exploring the outdoors together in Cornwall. They are standing with their arms around each other at the coast.
Investing Articles

£503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years

This FTSE 250 stock has averaged a huge return for 15 years. At today's price, £503 buys 14 shares. But…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

£1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years

This FTSE 100 mining stock has returned close to 30% a year for a decade. At 3,995p, £1,000 buys 25…

Read more »

Female student sitting at the steps and using laptop
Investing Articles

Down 47%, is this growth stock finally worth buying in May?

With a £288m order book and a hidden pipeline of defence and nuclear contracts, is this growth stock now too…

Read more »

House models and one with REIT - standing for real estate investment trust - written on it.
Investing Articles

2 REITs yielding 7%+ to consider for passive income in 2026

A REIT backed by the NHS and another backed by Tesco and Sainsbury's with both yielding 7%+. Here's why I'm…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

Just 97 shares of this UK dividend stock generate £238 in passive income

A 5.7% yield, £238 in passive income from just 97 shares, and one of the most divisive dividend stocks on…

Read more »

ISA coins
Investing Articles

£10,000 in an ISA generates a second income of…

The London Stock Exchange is home to some of the world's most generous dividends. But how big a second income…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Expert recommendations: 2 top income stocks yielding 7%+!

With yields of 7.2% and 7.8% respectively, these two income stocks are catching the eyes of institutional analysts. Should investors…

Read more »

Illustration of flames over a black background
Investing Articles

3 top income-focused stocks to buy in May 2026, according to experts

Looking for a stock to buy for income in May 2026? Experts have flagged these three UK dividend shares as…

Read more »