There are not many shares that offer a yield of 16%. But one such high-yield opportunity listed on the London stock market is the Income & Growth Venture Capital Trust (LSE: IGV).
But a 16% yield immediately raises a question in my mind. Is such a juicy payout sustainable? Or could it be a red flag that the City expects a dividend cut?
After all, dividends are never guaranteed and past performance is not necessarily an indication of what to expect in future.
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Inconsistent dividends for a reason
Looking at a share’s dividend history is not a dependable guide to what may happen down the line. But it can still be helpful in understanding how a company thinks about dividends.
Take Income & Growth as an example. Last year, it paid 8p a share in dividends. That was lower than the previous year’s 9p a share that, in turn, was a marked fall from the 14p a share paid in 2020.
Then again, so far this year, the trust has already declared a dividend of 11p a share. That is close to one sixth of its current share price.
Such jumps in dividend size reflect the trust’s business model. It invests in early-stage and growing firms, sometimes for many years at a time. When it sells its stake in a business that has done well, that can give it some money to use in buying stakes in new companies, or paying dividends.
But the timing, scale and profitability of such sales are not predictable. That impacts the trust’s ability to pay dividends from one year to the next.
Aiming for a certain payout
Nonetheless, the high-yield share has been paying out substantial dividends year after year.
It aims to pay at least 6p a share in dividends annually. It has done that consistently over the past few years. Given the proven ability of the fund managers in selecting attractive young companies in which to invest, I am optimistic that the trust will be able to deliver on its dividend target.
That is not guaranteed, of course. In a challenging economy, small- and medium-sized firms can struggle to make money. That could hurt income for the trust and also reduce the price it might achieve when selling its stakes in such businesses.
Long-term, high-yield potential
But despite the risks, I think there is potential for the trust to keep performing well and deliver on its dividend target.
It may also exceed it, as it has already done this year. But even at 6p a share annually, the current share price suggests a prospective yield of over 8%.
I find that attractive and would consider buying the shares for my portfolio on that basis. But I reckon that, taken over the long term, the trust could pay out higher dividends. So buying it at the current share price could help me earn a high yield in years to come.
If I had spare cash to invest today, I would be happy to add the shares to my portfolio.
