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Urban Logistics REIT 

What it does: Urban Logistics REIT owns and operates more than 100 warehouses single-occupant designed for ‘last mile’ delivery.

By Royston Wild. Recent panic selling of UK assets has pushed prices of many top property stocks sharply lower. As a result, I believe Urban Logistics REIT (LSE: SHED) is an attractive buy for investors this November. 

At current prices, the FTSE 250 firm’s dividend yields for the next two financial years sit at an enormous 6.1% and 6.5% respectively. 

Property shares often provide investors with solid protection against high inflation. This is because they are usually able to raise rents in order to eliminate (or at least offset) increasing cost pressures.  

With UK inflation at 40-year highs and tipped to go higher, Urban Logistics could therefore be an effective wealth preserver. 

I wouldn’t just buy this REIT for the here and now, however. I’m expecting earnings (and consequently dividends) to grow strongly over the next decade as e-commerce steadily expands. 

Demand for the warehouses and distribution properties it owns appear on course to improve rapidly. And rents will likely stride higher given the weak construction outlook for this particular sector.

Royston Wild does not own shares in Urban Logistics REIT. 

LondonMetric Property

What it does: LondonMetric property is an urban logistics real estate manager with 17 million square feet in its asset portfolio.

By Zaven Boyrazian. LondonMetric Property (LSE:LMP) has been on a roll lately. Despite what the 33% drop in share price would suggest, the urban logistics property manager is seemingly thriving. In fact, as of October this year, occupancy stands at an impressive 99%, with an average lease term of 12 years among its tenants.

Even with e-commerce slowing on the back of reduced consumer spending, demand for urban logistics centres continues to grow – a trend management seems to be capitalising on successfully. As such, the stock offers an impressive 5.5% dividend yield.

With interest rates rising, real estate investment trusts like Londonmetric Property have been hit hard due to their high debt balances. But a closer look at the company’s loans reveals that 80% of its debts are either hedged or on a fixed rate.

In other words, the threat of rising interest rates to this business may not be as disastrous as many think. And that’s why I believe a buying opportunity in this stock has emerged for me.

Zaven Boyrazian does not own shares in LondonMetric Property.

Diversified Energy Company

What it does: Diversified Energy Company owns and operates around 67,000 mature natural gas and oil wells in the US.

By Charlie Carman. Diversified Energy Company (LSE: DEC) shares have climbed nearly 17% this year. The FTSE 250 stock offers a handsome 11% dividend yield.

A key reason I’m bullish is President Biden’s drive for American energy independence. As a domestic producer, the firm should benefit from White House policies designed to combat spiralling commodity prices fuelled by the Russo-Ukrainian war and OPEC+ production cuts.

In addition, I’m encouraged by the company’s recent share buyback scheme to capitalise on sterling’s weakness against the dollar.

Admittedly, DEC posted a $935m net loss in H1 2022, which concerns me. I’m also sceptical about the accounting accuracy of decommissioning liabilities, which assumes its old wells will survive until 2095.

Nonetheless, the business model looks healthy overall. In particular, I like the robust 22% free cash flow yield that underpins DEC’s market-leading dividend. With supportive government policies acting as a tailwind for the foreseeable future, I’d buy this stock in November.

Charlie Carman does not have a position in Diversified Energy Company. 

DS Smith

What it does: DS Smith provides sustainable packaging solutions, paper products and recycling services worldwide.

By Kevin Godbold: Despite all the gloomy economic news around, DS Smith (LSE: SMDS) issued an upbeat trading statement on 10 October.

The company reported “good and consistent” trading. And the directors said overall performance for the year will likely be ahead of their previous expectations. DS Smith is one of many businesses that have been confounding the market’s expectations recently.

I like the company’s robust cash flow record — ideal for supporting its progressive dividend policy. And after prudently skipping a few dividends in the depth of the pandemic, DS Smith has jumped straight back in to the groove of pushing the shareholder payment a little higher each year.

There’s competition in the sector. But DS Smith is well established. And I think the industry has a tailwind. Meanwhile, with the share price near 290p, the forward-looking yield is running at around 6%. I think that’s attractive.

Kevin Godbold does not own shares in DS Smith.

Imperial Brands

What it does: Imperial Brands is a multinational tobacco company and is the world’s fourth-largest international cigarette company measured by market share.

By John Choong. The Imperial Brands (LSE: IMB) share price has remained rather robust this year, outperforming its parent index by quite some margin. Not to mention, its excellent dividend yield of 7% paired with a solid history of payment makes it a lucrative income stock to buy for my portfolio.

Luxury goods tend to benefit during times of inflation due to their inelastic demand. Most of Imperial’s products are catered to a niche market, and has been evident in the company’s last couple of results. Although growth hasn’t been stellar, it’s certainly been robust, while dividend payments continue to increase. The company also recently announced a share buyback programme, which should bring more value to shareholders.

With its next ex-dividend date estimated to be later this month, I’m planning on starting a position and capitalising on the ability to generate passive income in the current inflationary environment.

John Choong has no position in Imperial Brands.

Direct Line

What it does: Direct Line provides motor and general insurance in the UK.

By Christopher Ruane. Insurance tends not to be a very exciting business. In fact, it is often rather boring. As an investor, though, that is precisely why I like it. Demand is relatively stable, proven operators have enough experience to price risks at the right level, and the business model does not look like it will stop working any time soon.

Direct Line (LSE: DLG) has those characteristics. It avoids the more exotic corners of the insurance market and is highly profitable.

Right now, Direct Line shares yield 11.4%. That is certainly attractive to me, which is why I own some. It is also high compared to most FTSE 250 peers, though. Does that suggest a cut is coming? Rising vehicle costs pose a threat to profit margins and that could continue in coming years. But the company’s business model, iconic brand and large dividend make it appealing to me.

Christopher Ruane owns shares in Direct Line.

Tritax Big Box

What it does: Tritax Big Box REIT owns, manages and develops logistics real estate in the UK.

By Paul Summers: My pick for November is FTSE 250-listed real estate investment trust (REIT) Tritax Big Box (LSE: BBOX). Having tumbled over 40% in value in 2022, its shares yield a very respectable 4.9%. 

Now, I could shoot for more income elsewhere. However, I’d rather back Tritax for two reasons. First, it’s a relatively low-risk way of tapping into the ongoing growth of e-commerce (the company provides warehouses for some of the biggest retailers around).

Second, the fact that REITs are able to raise rents to cover rising costs without too much fuss makes Tritax a great option for battling inflation. 

Having coveted the stock for so long but been put off by the price tag, now could be an excellent time for me to begin building a position by buying its shares in November. 

Paul Summers has no position in Tritax Big Box.

Aviva 8 ⅜% PF 8 ⅜ CUM IRRD PRF #1

What it does: Aviva is a multiline insurance company. Its preferred stock pays a fixed dividend of 8.375p per year.

By Stephen Wright. My best British income stock for November is Aviva 8 ⅜% PF 8 ⅜ CUM IRRD PRF #1 (LSE:AV.B) Catchy name, but what is it?

In short, it’s Aviva’s preferred stock. Unlike the common equity, the stock pays a fixed dividend of 8.375p per year. 

That dividend has to be paid by management before any dividends get paid to common shareholders. And if it doesn’t get paid in a particular year, it rolls over and all of the outstanding dividends have to be paid to preferred shareholders before any are paid to holders of common stock.

The shares can’t be bought back by the company outside of an Extraordinary General Meeting. So I expect to keep receiving the dividends from these for some time.

In a turbulent market, I’m looking for something relatively predictable. That’s why I’ve settled on this as my choice.

Stephen Wright owns shares in Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1.

M&G

What it does: M&G is a savings and investment management company, managing shares, real estate and other assets.

By Alan Oscroft. Like others in the investment management business, M&G (LSE: MNG) has fallen out of favour among investors in the current economic crisis.

The share price slumped when inflation started escalating a few months ago. After a modest October recovery, though, M&G is only around 10% down over the past 12 months.

That still leaves the forecast dividend on a hefty 10.5% yield. It’s risky relying on a dividend forecast. But M&G is currently engaged in a share buyback programme, which suggests it has the cash available.

The incoming chief executive and the chairman both bought M&G shares in October, which is also encouraging.

In the first half, its Wholesale Asset Management business achieved net client inflows for the first time since 2018. The second half could prove tougher, and that’s where the short-term risk lies.

But I’ll be considering M&G as the next stock for me to buy as a long-term dividend investment.

Alan Oscroft does not own M&G shares.

BlackRock World Mining Trust

What it does: BlackRock World Mining Trust in an investment trust that runs a diversified portfolio of global mining stocks.

By Ben McPoland. The decarbonisation of the global economy is going to take many decades. And this transition is going to need a lot of raw materials. Whether it’s iron ore to make wind turbines or lithium for the batteries of electric vehicles, decarbonisation is a massive tailwind for mining companies. The BlackRock World Mining Trust (LSE: BRWM) is perfectly placed to capture this demand, I believe, as it has positions in most of the companies mining and selling these vital raw materials.

Some of the trust’s largest holdings include BHP Group, Glencore, and Rio Tinto. It has a dividend yield of 7%, and the payouts have increased substantially over recent years

It should be noted that mining shares can experience much more volatility when compared to other investments. However, I’d be inclined to see dips in the trust’s stock price as opportunities to buy more for my holdings. I intend to start a position myself in November.

Ben McPoland has no position in BlackRock World Mining Trust.

High-yield dividend shares

Before revealing the identity of the companies, I will describe some of their features.

One buys up old gas wells in the US and sells the energy from them. With energy prices riding high, that could be a very lucrative business model. The company has been actively buying thousands of such wells that are no longer economic or strategic for large producers but have gas left in them. That could turn out to be a stroke of deal-making genius.

It pays dividends quarterly and has a track record of raising them over the past few years. But one risk I see in addition to unpredictable energy prices is the possible costs of decommissioning tens of thousands of aging wells as they reach the end of their working life.

The other company operates on this side of the Atlantic. It builds and sells houses. The company’s business model means it typically has attractive profit margins. Last year, for example, its net profit margin after tax was around 22%. This year, average selling prices have risen but in the first half, sales volumes slipped compared to the same period last year. A key risk I see is the UK housing market losing steam, which could hurt both sales and profits.

Who’s who

The first company is Diversified Energy (LSE: DEC) and currently yields 11%. The second is Persimmon (LSE: PSN). It now yields an eye-watering 16%.

Both of the companies clearly face risks that could lead to lower dividends in future. One thing that unites them is that profits could be hurt due to a cyclical risk of falling prices, whether in energy or homes.

Despite that, of the two shares, the one I would consider buying for my portfolio is Persimmon. Why?

Weighing risks and rewards

In short, both shares carry sizeable risks. But I think the risk-to-reward ratio looks better at Persimmon than Diversified.

Persimmon has proven its business model over the course of decades. Housebuilding as an industry has long roots, although it does also throw up quite a few business failures when demand falls. Diversified is a much newer company and its business model is innovative. That means it could turn out to be surprisingly lucrative — but there is also a risk it is not sustainable, for example when wells are due to be capped.

Despite its beefy dividend, Diversified has recorded an accounting loss in the past couple of years. By contrast, Persimmon’s post-tax profit last year topped three quarters of a billion pounds.

Often a substantially higher yield can signal elevated risk. Although Persimmon’s yield is higher, I am actually more comfortable with its risk profile as a fit for my personal investment objectives than I am with that at Diversified. So of the two shares, the one I would consider buying today for my portfolio is Persimmon.  

These are the questions I’m hoping to answer today.

#1: Persimmon’s 12% yield

At the top of my list is FTSE 100 housebuilder Persimmon (LSE: PSN). This popular dividend stock yields 12%, based on a payout that’s been unchanged since 2017 (except during the pandemic).

So far, Persimmon’s dividend has been comfortably covered by its profits each year. Analysts expect this to be true again in 2022. Forecasts suggest earnings of 250p per share, covering the dividend of 235p.

However, there’s an obvious weakness here. What if earnings fall? The latest Halifax House Price Index showed house prices falling by 0.1% in July. Although that’s only a tiny change, it’s the first fall since June 2021.

Faced with the rising cost of living and higher mortgage rates, I think there’s a chance house prices could fall more significantly.

I don’t expect a full-on crash. Indeed, I think Persimmon will continue to trade well. But I think that the group’s profits could fall over the next year or so, increasing the risk of a dividend cut.

#2: Diversified Energy could top 11%

US firm Diversified Energy (LSE: DEC) specialises in buying up old oil and gas wells in states such as West Virginia and Ohio.

According to Diversified’s website, it currently owns around 67,000 wells. The company’s latest production figures show that it produced 136,000 barrels of oil equivalent per day during the first half of 2022.

That’s equivalent to an average just 2 barrels of oil equivalent per day from each of the company’s wells.

Critics of Diversified’s business suggest that old wells may leak methane and will be expensive to decommission. Diversified’s own figures suggest that shutting down all of its wells could cost $1.4bn.

However, chief executive Rusty Hutson says that the market is underestimating Diversified’s ability to generate cash.

While energy prices stay high, I think Diversified’s forecast yield of 10.8% looks safe enough. Indeed, broker forecasts suggest another increase next year that would push the dividend yield above 11%.

Unfortunately, I think the longer-term outlook is more uncertain. In my view, investors need to do their own research before considering an investment in this unusual business.

#3: Will new boss cut Jupiter’s dividend?

Shares in FTSE 250 asset manager Jupiter Fund Management (LSE: JUP) have fallen by 65% since departing chief executive Andrew Formica took charge in March 2019.

This slump has been driven by falling assets under management, as customers have withdrawn their cash from underperforming funds. Jupiter’s assets under management have fallen from £59bn to £49bn since the end of 2020.

As a result, the company’s fee income has also fallen. Jupiter’s forecast earnings no longer cover its dividend.

Broker consensus forecasts suggest that Jupiter’s next CEO, Matthew Beesley, could cut the dividend from 17.1p to 13.1p per share. That would give a yield of 10.8%.

If Jupiter’s performance improves, I think the shares could be good value at this level. But I don’t know how likely this is, so this isn’t a share I’d buy right now.

At the moment, I can earn a 12% dividend yield from a couple of shares. But are they the right choice for my ISA?

Persimmon

Persimmon (LSE: PSN) is a well-known housebuilder and member of the FTSE 100 share index. Despite that, its stock currently looks unloved. The share price has crumbled 37% in a year and it now yields 12.7%.

That is an unusually high yield. Often when a dividend has a high yield it is a sign of elevated risk. Is that the case at Persimmon?

I think it could be. After all, the economy is slowing and that might push the housing market downwards. Lower selling prices could lead to both revenues and profits falling at housebuilders such as Persimmon. If that happens, the dividend could be on the chopping board.

But, for now at least, demand for housing seems to be robust. Persimmon has been around for decades and navigated its way through the housing cycle quite a few times. If the housing market falls steeply again it may indeed cut its dividend.

Yet given today’s high yield, if it cuts rather than completely cancels the dividend, it may still provide a juicy payout. I see Persimmon’s long experience in the housing market as a strong asset that could help it in years to come. For that reason, I would consider buying this high yielder for my Stocks and Shares ISA.

Diversified Energy

Another firm yielding a similar amount – 12.4% — is gas provider Diversified Energy (LSE: DEC). Although listed in London, the company’s tens of thousands of wells are in the US. Its unusual strategy consists of buying wells nearing the end of their productive life, then squeezing more years out of them.

If it can buy the wells cheaply but sell the gas at market prices, that could be a lucrative model. Indeed, at the moment the company is riding the wave of a booming energy market and paying juicy dividends.

I think the model is interesting – and the double-digit percentage yield certainly catches my attention. But I also see some risks. An obvious one is the next fall in energy prices. If selling prices tumble, that will likely hurt both revenues and profits at Diversified.

I also fear that the clean up cost of wells could turn out to be a big liability. Diversified has increased its focus on that and even acquired a company that specialises in taking wells out of service. But I am still concerned that such wells could prove more costly to wind down than the company expects. For that reason, I do not now plan to add the company to my Stocks and Shares ISA

Risks and rewards in my Stocks and Shares ISA

It may be no coincidence that both these double digit yielders are in cyclical industries, with the risk of dividend cuts that brings. There is no guarantee that the current 12% yield will be sustained for either.

But I have a diversified portfolio and I would consider Persimmon as a possible addition to it.

It’s certainly worth noting that sizeable dividend yields are not always sustainable. Sometimes it reflects the fact that investors aren’t too keen on the industry, such as tobacco. Equally, the dividend may have been raised after an excellent year, but long run performance isn’t expected to be as good.

The firms I’m looking at today have big yields, and I accept that they might be reduced eventually. However, I’m also positive on the long-run credentials of these stocks.

So here are three stocks I’ve bought, or am looking to buy, to negate the impact of inflation on my portfolio and help it grow.

Synthomer

Synthomer (LSE:SYNT) currently offers a huge dividend yield of 12.5%. The mega-dividend is being paid on the back of a stellar year for the latex glove manufacturer.

Synthomer registered pre-tax profits of £283m in 2021. That’s more than double any year before the pandemic. However, the stock is now trading below pre-pandemic levels despite analysts suggesting demand for its products remaining strong.

Barclays recently downgraded the stock, noting volatility in the market, but its target price is around 30% higher than the current trading price.

The firm recently took on a new CEO, so there could be some short-term issues as the company transitions.

Diversified Energy Company

The Diversified Energy Company (LSE:DEC) is a lesser-known big-dividend payer. At today’s price, the yield is 11.1%. That’s pretty huge.

The firm has been paying sizeable quarterly dividends and recently went ex-div. There’s a 4.25c one declared for September as well.

DEC is one of the world’s biggest owner of natural gas wells, with over 60,000 in its portfolio. Amid higher commodity prices, the company successfully increased production, reaching 136,000 barrels of oil equivalent per day.

It operates mature wells, so capping them will come at a cost. I’d assume this puts its break-even point a lot higher than its peers, and therefore makes it more susceptible to a fall in oil prices.

However, it’s also set to become a leading provider of well retirement services to third-party operators in the Appalachian States.

Rio Tinto

I’m finally looking at adding Rio Tinto (LSE:RIO) to my portfolio after the share price fell in recent weeks.

The company had been going from strength to strength in recent months on the back of soaring commodity prices. But negative economic forecasts and Chinese lockdowns have negatively impacted the share price.

A reported plan by the Chinese government to centralise iron ore procurement has also seen the share price fall. However, I think we’re entering a period of scarcity in which commodity prices will remain higher in the long run.

There are several reasons for this. An increase in infrastructure spending in the developing world will push up demand for iron ore and other metals used to make steel. Meanwhile, the EV revolution will increase demand for certain rare earth metals.

At today’s price, Rio Tinto has a whopping 11.3% dividend yield.

I have a varied portfolio of passive income shares, but today I’m looking at five ultra-high-dividend paying stocks that I’ve got on my watchlist.

Persimmon

Persimmon has the highest dividend yield on the FTSE 100. At today’s price, the yield would be around 11.2%. The strong dividend comes on the back of stellar year for housebuilders but there might be some short-term pain for the industry. Higher interest rates could dampen demand for new homes while Persimmon has had to put aside £75m for dangerous cladding removal. These factors have weighed on the share price. I’d like to see more data on UK property demand before I buy, although I’m bullish on long-term UK property demand.

Synthomer

Synthomer stock boomed during the pandemic as demand for latex gloves surged. But now the share price has returned to pre-pandemic levels. The group is now going through a period of change, after a recently completed acquisition in the US that created a new adhesives division. There’s also a new chief executive.

Synthomer’s latest trading update reported an “encouraging start to the year”. In a post-pandemic world, you’d imagine that demand for its product will remain strong. Analysts have reinforced this forecast. The firm is also a very attractive passive income option. Based on the company’s latest annual dividend and the current share price, Synthomer has dividend yield of 10.3%. I think this could be a good addition to my portfolio.

Steppe Cement

Steppe Cement isn’t well known, but the Kazakh cement manufacturer currently offers a 10.7% dividend yield. 2021 was a strong year for the company as the Kazakh property market came close to overheating. The market is expected to cool in 2022 but long-term demand should stay strong. One problem is the spread between the buying and selling price for this stock. It’s on my watchlist for now.

Direct Line

Direct Line is a dividend big-hitter. Last year, it made £343m in post-tax profits and raised its basic dividend slightly. At today’s price, the insurer is offering a 9.4% yield. The company recently announced a share buyback which, for me, represents a vote of confidence in future operations.

Regulation changes and fintech entries could hurt Direct Line’s market share and profitability, but with its little red telephone logo, Direct Line a well-known and trusted brand. However, I’d like to see revenue move in the right direction before I buy.

Diversified Energy Company

Diversified Energy Company is a lesser-known gas and oil company focusing on mature wells. It’s the world’s biggest owner of natural gas wells, with over 60,000 in its portfolio. The FTSE 250 company recorded full-year production of 119,000 barrels of oil equivalent per day in 2021, up 19% on 2020. December production rate reached 139,000 barrels per day, up 35% over December 2020. With Brent Crude sitting above $100 a barrel, 2022 could be a good year for DEC if these rates are maintained.

However, it also has to cap its wells which could prove expensive and raises concerns about the long-term profitability of the business.

Currently, the Diversified Energy yield is 9.2%.

That is a big difference. Then again, sometimes a high yield reflects a high risk. No dividend is guaranteed.

Persimmon

Housebuilder Persimmon is one of the few FTSE 100 members to pay a double-digit dividend (another is Rio Tinto). With a dividend yield of 10.4%, Persimmon pays out well over twice the average of its peers. How come – and can it continue?

One reason is the company’s policy of returning excess capital. While many rivals keep a lot of extra capital in their business, Persimmon pays it out as dividends. That means its dividend is covered by earnings, but only narrowly. So if earnings fall, for example because of a housing market crash, I would expect the dividend to follow.

Another reason for the high yield is that investors have been turning more negative on builders like Persimmon, pushing the yield up as the share price falls. The Persimmon share price has fallen 29% in the past year. I like the company’s high profit margins and reckon that even if housing prices fall, there will still be demand for new housing. So I would consider holding Persimmon in my portfolio.

Diversified Energy

Another investment that offers me double-digit dividends at the moment is Diversified Energy (LSE: DEC). The gas and oil company is little known compared to industry giants like Shell and BP. But it is the world’s biggest owner of natural gas wells, with over 60,000 of them in its portfolio.

However, those wells are typically small ones. They are often in the sunset years of their production. The business model is to eke out remaining gas from wells the company can buy cheaply. That has helped it pay a hefty dividend. Currently, the Diversified Energy yield is 10.7%.

But the cost of capping so many wells when they are retired could eat into Diversified’s profits. It is a relatively new company so we simply do not know how well its business model is likely to work over the long term.

Another risk is moves in gas prices. At the moment, high prices can help profits. But if gas prices collapse, that could hurt the profitability of the company.

Although I like Diversified’s innovative business model and am tempted by its yield, the risks are a bit too much for my tolerance. So I do not plan to add it to my portfolio.

Making a move on double-digit dividends

That could change if Diversified demonstrates it can cap thousands of wells a year without hurting profitability too much.

Meanwhile, I would think about adding Persimmon to my portfolio. It too has risks, as I would expect from any shares and certainly those offering double-digit dividends. But as a buy-and-hold investor, I would be happy to tuck it away in my portfolio for years to come.

Innovative business model

The company in question is gas and oil producer Diversified Energy (LSE: DEC). Unlike many energy giants, Diversified is not a household name. Although it is listed in London, its operations are in the US.

With a market capitalisation of less than a billion pounds, the company is not a big player in the global energy space. Its innovative business strategy also sets it apart. A lot of energy companies invest in drilling for new wells, hoping to strike it big and find new energy reserves. By contrast, Diversified buys up old wells that have already been in use for a long time. It hopes to squeeze out more gas from them even when other producers have decided to stop pumping. By owning tens of thousands of such wells, the company reckons it can build scale even though each one individually is small.

Double-digit dividend

So far the strategy has been rewarding for Diversified’s shareholders.

This week the company announced its final results for last year. They included an 8% increase in the annual dividend, to 16.5c per share (around 12.5p). That means that the annual dividend per share will have increased by 50% in just three years.

Such dividend increases, along with a double-digit yield, certainly catch my attention as an investor. On top of that, Diversified pays out dividends on a quarterly basis. That could also be attractive from a passive income perspective.

My concerns about this high yielder

But despite the apparent attractions of the share from an income perspective, I have some concerns about holding Diversified in my portfolio.

Energy prices are very volatile right now. High prices could definitely be good for profits at Diversified. But my concern is whether we will see increased production hurting gas prices in the future.

On top of that, I think a big risk to future profitability is the cost of capping wells. With its huge estate of wells, Diversified could face a big bill to stop them leaking gas after the end of their working lives. The company is actively addressing this concern and has even bought its own well capping specialist. But the company still reported an average well retirement cost of $22,500 per well last year. With around 67,000 wells on its books that could add up to large retirement costs in future, eating heavily into profits.

My next move on Diversified Energy

I was already attracted by the yield at Diversified. The growing dividend makes it even more attractive to me.

But I have concerns about the long-term impact of capping the company’s thousands of wells. That could add costs that hurt the firm’s ability to sustain its dividend. So, for now at least, I am not buying Diversified shares for my portfolio.

Looking at what’s going on in the energy market today, I think there could potentially be further upside for oil stocks. Right now, the oil market is capitalising on rising demand, low global inventories, underinvestment in drilling rigs (due to the shift towards renewable energy), and high levels of geopolitical tension. This combination could push oil prices as high as $150, according to some analysts.

Here, I’m going to highlight some oil stocks listed on the London Stock Exchange. If I was looking to capitalise on higher oil prices by investing in stocks, these are some of the shares I’d consider for my own portfolio.

Oil giants

Let’s start with Shell (formerly Royal Dutch Shell). It’s the largest oil stock in the UK with a market-cap of around £150bn, and one of the industry’s ‘supermajors’.

Shell’s recent Q4 2021 results showed the company is doing well right now. For Q4, adjusted earnings came in at $6.4bn, up from $4.1bn in Q3. Meanwhile, adjusted earnings for 2021 amounted to $19.3bn versus $4.8bn a year earlier. On the back of these strong results, Shell raised its dividend by 4%. It also announced a share buyback programme of $8.5bn for the first half of 2022.

Shell currently trades on a forward-looking P/E ratio of about eight and sports a dividend yield of around 3.7%, so it appears to offer value right now. However, a risk to be aware of here is that many institutional investors are dumping oil stocks in an effort to focus on sustainable investments. This could put pressure on the share price in the long run.

Also in the large-cap space, there’s BP (LSE: BP). It’s another global oil giant with a huge market-cap (£76bn).

Now BP is in the process of transitioning to a renewable energy company. In 2020, it announced a major transformation programme in an effort to be a net zero business by 2050. However, today, BP is still very much an oil company and this means it can benefit from higher oil prices.

Like Shell, BP has seen a massive increase in its profits recently. For 2021, it generated a profit of $7.6bn versus a loss of $20.3bn in 2020. Meanwhile, operating cash flow jumped from $12.2bn in 2020 to $23.6bn in 2021.

“The company is a cash machine at these sorts of (oil and gas) prices and the business is running very well,” CEO Bernard Looney said last year.

At present, BP trades on a P/E ratio of around seven, with a yield of about 4.2%. This indicates the stock is cheap. However, the company’s transition to renewable energy adds risk to the investment case. This is going to cost the group a lot of money and there could be setbacks along the way.

A mid-cap oil stock

In the mid-cap area of the market, one company that looks interesting to me is Diversified Energy (LSE: DEC). Formerly Diversified Gas & Oil, it’s an established, independent owner and operator of producing natural gas and oil wells in the US. Its goal is to acquire and manage mature natural gas and oil properties to generate cash flows and growth for the long-term benefit of its stakeholders.

Analysts expect Diversified Energy to post a large increase in revenues and profits for 2021. Revenue for the year is expected to come in at $960m, up from $409m in 2021. Meanwhile, net profit is expected to amount to $195, versus a loss of $23.5m in 2020.

In a recent trading update, management was very confident in relation to the outlook. “As I survey our prospects, our outlook is as dynamic as I’ve seen,” CEO Rusty Hutson Jr said. “We enter 2022 with great momentum,” he added.

DEC shares currently trade on a forward-looking P/E ratio of about six so the stock is not expensive. It’s worth pointing out that the company has recently been embroiled in a row over the impact of its gas wells on the environment. This is an issue to keep an eye on.

Small-cap oil stocks

Turning to the small-cap space, one stock that’s worth highlighting right now is Gulf Keystone Petroleum (LSE: GKP), which has a market-cap of £443m. It’s an independent oil company that operates in the Kurdistan region of Iraq. Its main asset is the Shaikan Field – a giant oil field covering an area of 280 square kilometres.

GKP experienced a significant drop in revenues and profits when oil prices crashed during Covid-19. However, it’s now seeing a big rebound. For 2021, analysts expect revenue and net profit to come in at $315m and $155m respectively. That compares to $108m and -$47.3m in 2020.

Another small-cap oil stock worth highlighting is Jadestone Energy (LSE: JSE). It’s an under-the-radar oil and gas development and production company that has assets in Asia and Australia. It currently has a market-cap of around £420m.

A recent trading update from Jadestone was very encouraging. Not only did the group say it expects 2022 production to average 15,500 to 18,500 boe/d, a 30%+ increase on 2021 (with the majority being oil), but it also said that it may increase capital returns to investors.

“Based on our spending forecasts, we expect to generate material incremental cash in 2022 at current oil prices and premiums, and as a result, an increase in shareholder returns, either through increased dividends and/or share buy-backs, may be considered later in the year,” president and CEO Paul Blakely said.

While both of these stocks look cheap right now, it’s worth pointing out that small-cap oil stocks such as GKP and Jadestone tend to be high-risk investments. If oil prices fall significantly, these kinds of stocks can crash. Small oil producers also tend to have high levels of operational risk too. GKP, for example, has had some issues collecting recent payments. So these stocks are more speculative in nature.

I believe the number of enterprises on the market that can produce a reliable passive income stream is tiny. These businesses have to exhibit a couple of qualities if they are to make it into my portfolio.

The best passive income shares to buy

First of all, they have to have a solid competitive advantage. This should help them stay ahead of the competition and earn market-leading profit margins, which will ultimately support their dividend payout to investors. 

Secondly, the best dividend shares to buy for my portfolio must have a strong balance sheet. These companies have more financial flexibility and do not have to worry about meeting their obligations to creditors when the times are tough. This could mean the dividend is more sustainable. 

The final quality I am looking for in passive income stocks for my portfolio is a track record of shareholder returns. Past performance should never be used to guide future potential, but it can be a good indicator of a company’s intentions. This is something I try to take into account when analysing potential investments. 

Here are three dividend shares yielding 7% or more that I would buy from my portfolio today. I believe all of these companies meet the passive income criteria I have outlined above. 

My favourite dividend shares

The first company on my list is a stock I already own. Regional REIT Limited (LSE: RGL) owns a portfolio of office properties located outside the M25. 

Usually, I would steer away from real estate investment trusts with too much exposure to office properties because this market does not fall inside my comfort zone. However, Regional is headed by a strong management team with an excellent track record of finding undervalued opportunities.

For example, last year, the company sold a portfolio of industrial properties for £45m. Not only did the group manage to sell these at a near-8% premium to the valuation report at the end of 2020, but it also achieved an overall 18% increase in value from the purchase price.

By renovating some larger units and improving occupancy across the portfolio, the company was able to enhance the quality of the asset and achieve a favourable price in an unfavourable market. 

Of course, there is no guarantee the organisation will repeat this success story. Rising interest rates could have an impact on property prices across the country. Demand for offices could also decline if the working from home movement persists.

Still, thanks to the company’s track record of creating value, relatively strong balance sheet, and 7.2% dividend yield, I would be happy to buy more of the stock for my portfolio. The net loan-to-value ratio at the end of September was 43%. That is a relatively modest level of gearing for any property portfolio. 

Passive income champion

Another company that exhibits all of the qualities I am looking for in the best dividend shares to buy is Diversified Energy (LSE: DEC). 

Usually, I would avoid the commodity sector when looking for long-term passive income investments. Commodity prices can be incredibly volatile. But Diversified Energy has an edge. The corporation hedges most of its gas production, which means management has a high level of visibility over future cash flows. 

That said, the firm does still have some exposure to volatile commodity prices. If the green energy transition forces hydrocarbon prices lower over the next decade or so, the company will not be able to mitigate this risk. That is probably the biggest challenge the group faces right now. 

Nevertheless, the company looks to me to be well managed. It also has a strong balance sheet supported by hedged cash flow from its hydrocarbon assets. The strategy also gives the business an edge in the market.

With profits and cash flows locked in, it can take advantage of opportunities in the commodity market its peers may have to overlook due to financing constraints. The stock offers a dividend yield of 10%, at the time of writing. 

Growth through acquisitions

I would also buy wealth management group M&G (LSE: MNG). With a dividend yield of 8.5%, the stock looks attractive as an income investment. It also has great growth potential. The company is expanding its footprint by snapping up smaller wealth managers. This could help the business grow its earnings per share and provide more capital to fund dividends. 

As the wealth management market is highly competitive, M&G needs to stay on its toes, or it could be left behind. This is probably the biggest risk the organisation faces right now. It needs to keep investing and developing its offering for consumers. If the company takes its market share for granted, competitors may start to draw customers away. 

Despite this challenge, it seems to me as if the business is well managed, has a growth plan in place, and has a relatively conservative balance sheet.

Indeed, as it operates in a highly regulated industry, it needs to prioritise balance sheet strength. This is both a benefit and a drawback for investors. It means the company is unlikely to overstretch itself. Still, regulators could act if they think the firm is paying out too much to shareholders in dividends. 

Even after taking this risk into account, I believe the company is one of the best shares to buy now for passive income.