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One potential dividend share that caught my eye is Diversified Energy Company (LSE: DEC). Should I buy this stock for my holdings to boost my passive income? Let’s take a closer look.
Energy wells
Diversified is an independent owner and operator of natural gas and oil wells. It acquires and manages oil and gas properties and operates in a number of US states.
So what’s happening with Diversified’s share price? Well, as I write, the shares are trading for 92p. At this time last year, they were trading for 135p, which is a 35% drop over a 12-month period.
It is worth remembering that many shares have pulled back due to macroeconomic struggles. These include soaring inflation and rising interest rates.
Pros and cons
Starting with the bull case, the obvious factor drawing me in right now is Dividend’s 14.5% dividend yield. For any dividend share I consider, I want to know if the yield, never mind an unusually high one, is sustainable. I can see the business supports its dividend through free cash flows, of which it has plenty.
It does like to borrow money to fund acquisitions, although it has shown a great record of paying down debt. Finally, it has a good record of dividend payout. However, I am aware that dividends are never guaranteed.
Moving on, acquisitions are usually a positive sign for me. This is because it shows growth aspirations that could boost future earnings as well as investor returns. Last year Diversified spent half a billion dollars on acquisitions.
Finally, Diversified’s business model and current energy prices could boost performance and returns. If it can acquire cheap oil and gas wells and sell the energy at market rates, it could cash in. After all, energy prices at present are soaring.
Looking at the bear case, Diversified could see profits and payouts slump if energy prices fall. This is one of the biggest issues I will need to keep an eye on.
Next, although I’m a fan of acquisitions, they don’t always work out. The cost of purchasing, maintaining, and potentially selling a failing asset could be costly for Diversified. This could impact any dividends too.
Finally, I mentioned that Diversified usually borrows to fund acquisitions. It usually pays it back quite easily too, according to past records. My concern is that rising interest rates make debt costlier to service and pay down. This higher cost could eat into profits and investor returns.
A dividend share I would buy
After reviewing the pros and cons, I have decided I would be willing to buy some Diversified Energy Company shares for my holdings. I will do so when I have the spare cash to invest.
I am aware of a few ongoing risks that could derail Diversified’s progress. Overall, I’m buoyed by the firm’s business model, and record of performance and payout, as well as the current energy market. Although I am conscious that past performance is not a guarantee of the future, I think this is one dividend share that would boost my holdings.
