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The FTSE‘s home to some of the best dividend-paying companies in the world. High yields can be incredibly appealing, especially during uncertain market conditions. But as every seasoned investor knows, not all yields are created equal.
Sometimes a double-digit return can be a sign of trouble ahead rather than opportunity.
That’s why I’ve been looking closely at two FTSE shares with yields north of 10%. Both look attractive on paper, but I’m not convinced now’s the time to buy.
Energean
Energean‘s (LSE: ENOG) a London-listed oil and gas producer with operations across the Mediterranean and comes with a market-cap of around £1.64bn. The share price sits at roughly 890p, and the company’s dividend yield of 10.2% looks outstanding.
Profitability’s solid too – it boasts a return on equity (ROE) of 17.2% and a 7.5% net margin.
Over the past five years, Energean’s shares have risen 72.5%, a decent return considering how volatile the energy sector’s been. And with a price-to-earnings (P/E) ratio of just 10.2, it could even be described as a value play within the FTSE 250.
However, the one major concern that gives me pause is its £2.56bn debt load. That’s roughly five and a half times its total equity. The firm’s quick ratio – a measure of short-term liquidity – sits at just 0.47, suggesting limited cash on hand to meet obligations.
While cash flow from operations remains healthy for now, any downturn in energy prices could strain the business’s ability to service its debt, let alone maintain such a generous dividend.
That’s a risk I’d rather not take. For income investors, the yield might look mouthwatering, but I think it’s worth analysing how sustainable it really is.
Foresight Solar Fund Limited
The second FTSE share that caught my attention is Foresight Solar Fund (LSE: FSFL), which owns and operates solar energy assets across the UK and Europe. With a market-cap of £430m and a share price of 78p, it’s a much smaller player than Energean – but its 10.3% yield has certainly grabbed the market’s attention.
Foresight’s financials look strong at first glance. The balance sheet‘s clean, with no debt and a quick ratio of 3.42. It’s also been increasing dividends for eight straight years, which adds a touch of reliability. Revenue rose 8.84% year on year in its latest results, showing decent operational performance despite industry pressures.
However, the dividend coverage is a major concern. The company’s cash dividend coverage ratio stands at just 0.53 – well below the comfort level of 2 or higher. Meanwhile, its earnings per share (EPS) of 1p doesn’t come close to covering its 8p dividend per share. In simple terms, it’s paying out far more than it earns, which is rarely sustainable for long.
Unless earnings rebound, the fund might have to trim its dividend. That would likely send income-focused investors running for the exits.
Final thoughts
Both Energean and Foresight Solar Fund have attractive business models and operate in essential sectors. Yet the combination of high yields, fragile coverage and sector-specific challenges makes me cautious.
Those dividends might not be sustainable under current conditions. If cuts come, the share prices could tumble further. For now, I’ll keep both on my watchlist – but until their earnings and cash flow improve, I think there are safer FTSE shares to consider for reliable passive income.
