A 15.7% dividend yield! Is this a juicy income opportunity?

While most investors browse for the highest dividend yields among the FTSE 100 and FTSE 250, the Alternative Investment Market (AIM) also has ample income opportunities. And right now, Serica Energy (LSE:SQZ) stands out among its peers with a massive 15.7% payout!

Seeing a dividend yield this high is usually a warning sign as it indicates most investors believe the company will not be able to sustain payouts for long. And looking at Sericaâs share price chart, the downward trajectory of the stock certainly implies the same. For reference, the shares have tumbled over 70% since their peak in late 2022.

However, is this secretly a juicy income opportunity?

Too much on its plate?

Serica Energy has a lot on its plate right now. The oil & gas producer is in the middle of negotiating a merger with EnQuest, lobbying the government to lower windfall taxes on the energy sector after 2030, and also busy moving from AIM to Londonâs Main Market. At the same time, management’s also having to tackle falling natural gas prices as well as disruptions to production.

The impact of these operational headaches is laid out clearly in its 2024 results when compared to 2023.

The groupâs average realised gas price fell from 94p per therm to 76p
Total production fell from 40,100 barrels of oil equivalents per day to 34,600
Revenue tumbled from $917m to $727m
EBITDA before exploration expenses, or EBITDAX, dropped from $475m to $379m

Needless to say, these figures arenât what investors want to see, especially considering itâs a continuation of the downward trajectory endured throughout 2023 versus 2022. And yet, dividends have continued to flow to the pockets of shareholders.

Inspecting payouts

Despite the troubles with production, management’s taking steps to make the flow of oil & gas more reliable. And weâve already started seeing encouraging progress in the first quarter of 2025. Total production still fell short of expectations due to a necessary shutdown in response to Storm Ãowyn landing at 27,600 boepd. However, thatâs still ahead of the output achieved in the third and fourth quarters of 2024 respectively.

In the meantime, the groupâs exploration efforts have also started to yield fruit. Its Triton hub drilling campaign has seen two of the five wells finish drilling with promising results. And now both are expected to begin production in the near future. Meanwhile, drilling at the last of the five wells is now underway with production scheduled to start in early 2026.

Overall, 2025 looks like it could be the year Serica Energy gets back on track. Production for the year isnât expected to grow tremendously with an average output of 33,000 to 37,000 boepd. But production in the second half of 2025 is expected to be âmaterially aheadâ of this guidance range.

So if everything goes according to plan and oil & gas prices donât suddenly collapse, free cash flow generation in 2025 should support a continuation of the dividend even at the current double-digit yield. Having said that, the firmâs recent track record shows disruptions as the norm, so this is by no means guaranteed to happen.

Overall, Serica Energy still carries a lot of risk. But for investors willing to take the plunge, this AIM stock may be worth researching further.

The post A 15.7% dividend yield! Is this a juicy income opportunity? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.