Is this 9.8% high-yielder right for me?

There are a few UK dividend shares that offer yields around 10% — but not many. I’ve previously considered whether some double-digit high-yielders might fit my portfolio. Here I want to look at a share currently yielding just below 10% and consider whether I ought to buy it for my ISA.

Big yield and dividend maintenance

The shares in question are those of Hansard Global (LSE: HSD). The financial services company offers a yield of 9.8%. Not only that, but its dividend has been maintained for a number of years in a row. The last cut was in 2018. Since then, the firm has paid out a steady 4.45p per share annually in dividends.

But past dividend performance is not necessarily an indicator of what will happen next. How secure is the Hansard Global dividend?

Dividend safety

To answer that question, it’s helpful to know more about the company’s business. Hansard provides life assurance policies through financial advisers in a diverse range of markets worldwide. That is a profitable business. Last year, for example, it reported pre-tax profit (on an IFRS basis) of £4.7m. It also managed to grow the size of its new business, even in the face of the pandemic.

But what concerns me is the company’s free cash flow. Before it paid dividends, it had net cash inflow of £2.1m. But dividends cost £6m, meaning the company saw cash go out of the door. It was the same the year before. Again, positive cash inflow wasn’t sufficient to fund the dividends.

That makes me wonder whether Hansard can continue to pay its dividend at the current level. If the cash coming in doesn’t cover a company’s dividend, sooner or later it typically needs to cut its dividend or find new funds. But finding new funds doesn’t appeal to me. I prefer shares that pay dividends out of profits, not by injecting new cash into the business.

Things could change for the better. For example, if Hansard can cut the £19.1m of new business investment it spent last year, it could sustain dividends at the current level from free cash flow. But I see a real risk that Hansard will cut its dividend in future, given the current weak coverage from free cash flow.

Is this high-yielder for me?

There are other risks that concern me. That positive cash flow of £2.1m may sound decent, but the company’s revenue was £214.7m. That means its margins are pretty thin. A relatively small business surprise could thus have a big impact on free cash flow. On top of that, the company is pinning a lot on the success of its proposition in the Japanese market. That could involve costs, but if revenues don’t follow, it could also hurt cash flows. 

Hansard’s 9.8% yield definitely attracts me. But if positive cash flow continues to be less than the cost of the dividend, I don’t know how long it can continue. For that reason, I won’t be adding it to my portfolio.