A 22% yielding dividend stock to buy for passive income

When investing in dividend stocks, I often look at the FTSE 100 and the FTSE 250. However, there are many US stocks which boast extremely strong dividends, characterised by their high yields and sustainability. With a tremendous dividend yield of over 22%, the global shipping company Star Bulk Carriers (NASDAQ: SBLK), is one of my personal favourites. Here’s why. 

What does Star Bulk do? 

Star Bulk is involved in the dry bulk shipping market, which means that it transports goods such as iron ore, coal, and grain. These commodities are destined to be used in the global manufacturing and production process. In recent quarters, the dry bulk shipping market has been very strong. 

What’s the dividend situation?

There are very few dividend stocks that boast dividend yields of over 20%, and when they do, I often proceed with caution. This is because it can be a sign that the company will be unable to pay its dividend. However, in the case of Star Bulk, it has simply been reporting excellent results, which has enabled it to declare extremely large dividends. For instance, in the most recent quarter, net income totalled $170m, up from $35m the year before. This allowed the firm to approve a dividend of $1.65 per share for the quarter. For the past four quarters, the group has distributed a dividend of $5.60 per share. At the current Star Bulk share price, this equates to a dividend yield of 22%. 

However, Star Bulk has a unique dividend policy, which means that it is hard to predict future dividends. This policy bases the dividend on the company’s available cash at the end of each quarter, meaning fluctuations are likely. For example, in months where the firm is forced to pay off debt and make other large expenditures, the dividend is likely to be far lower. In other months, where profits soar, the dividend is likely to be very high. Although this does reduce the ability for investors to predict future payments, it has still led to very large returns. 

Risks for the dividend stock 

While profits have been soaring over the past few quarters, there are risks that this may be about to decline. For instance, the Baltic Dry Index (BDI), which tracks the price ocean transporters can demand, has slipped recently, falling from 3,370 in May to 2,260. This has been driven by the Chinese lockdowns, curtailing demand for products such as iron ore and the tragic war in Ukraine, which has closed half the nation’s ports. These factors may reduce the Star Bulk profits in the future, and therefore, also the dividend. 

But I would still buy this dividend stock. Indeed, the dry bulk shipping market is very cyclical and there is currently a shortage of new dry bulk carriers. Therefore, Star Bulk is in a prime position to capitalise on increased demand, which should support very large dividends. With a current price-to-earnings ratio of around 3, it seems that difficulties are factored into the Star Bulk share price. Therefore, I may add a small position to my portfolio for passive income.