Following solid H1 results, is it time for me to buy this 10.4%-yielding passive income star?
Energean (LSE: ENOG) currently generates one of the highest passive income return rates of any major FTSE index. Last yearâs $1.20 (89p) dividend on the present share price of £8.58 gives a yield of 10.4%.
This compares to the current average FTSE 100 dividend yield of just 3.4% and the FTSE 250âs 3.3%. It is also more than double the ârisk-free rateâ (the UK 10-year government bond yield) of 4.6%.
Moreover, analysts forecast that the oil and gas firmâs dividend yield will stay the same this year. In each of the next two years, it is projected to rise and hold around 11%.
How much passive income can be made?
On the current 10.4% yield, a £10,000 investment would make me £1,040 in first-year dividends. This would increase to £10,400 over 10 years on the same average rate and to £31,200 after 30 years.
This is a lot more than can be made from even the risk-free rate or from any regular savings account. However, it could be far greater if the standard investment practice of dividend compounding were used.
This simply involves reinvesting the dividends paid by a stock straight back into it. It is a similar concept to leaving interest to accrue in a savings account.
Using this method would generate £18,166 of dividends after 10 years, rather than £10,400. And after 30 years on the same basis this would increase to £213,440, not £31,200.
Including my initial £10,000 investment and the total value of my Energean holding would be £223,440 by then. And this would deliver a yearly passive income to me of £23,238!
How are its earnings prospects?
The key factor that supports dividend gains (and share price rises) over time is a firmâs earnings (profits).
A risk to Energeanâs is any sustained bearish trend in oil and gas prices. That said, the demand side for energy looks to be strengthening, along with the economic prospects of the worldâs largest energy importer, China. And the supply side looks like it may weaken, given the current ramping up of sanctions on Russia, Iran, Iraq, and Venezuela. These factors should support energy prices.
Indeed, analysts forecast that Energeanâs earnings will grow by a stunning 39% a year to end-2027. Moreover, its 11 September H1 2025 results showed profit after tax jumping 24% to $110m. Cash flow from operating activities rose 5% to $555m. And the interim dividend remained at 60 cents.
A share price bonus too?
My overriding concern in a dividend stock is that these payouts keep generating a high yield. But a rise in the share price is also welcome, of course, in case I want to sell the stock.
Its high earnings growth prospects should power Energeanâs share price higher (as well as its dividend) but by how much? In my experience, the discounted cash flow method is the best way for finding this out. It pinpoints where any stock should trade, based on cash flow forecasts for the underlying business.
In Energeanâs case, it shows the shares are 37% undervalued at their current £8.58 price. Therefore, their fair value is £13.62.
Given its high earnings growth forecasts, ultra-high yield, and significant undervaluation I will buy the stock very soon.
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Simon Watkins 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.
