Dividend stocks can be an excellent source of passive income and a solid component of a diversified portfolio. High-yielding dividend stocks are particularly enticing because of the prospect of significant payouts.
One stock with a high dividend yield is B. Riley Financial (RILY -3.47%), with a payout of almost 11%. The diversified financial services company yield is higher than in recent years. However, before diving headfirst into this stock, you must consider crucial factors. Here's why B. Riley Financial's dividend yield is so high -- and whether it will stay that way.
B. Riley's earnings have fluctuated wildly
Riley Financial provides various financial services to clients, including investment banking, brokerage, wealth management, asset management, business advisory, and asset disposal.
In 2021, investment banks were swimming in cash. Deal-making was at an all-time high, and investment bank fees surged. According to Refinitiv, investment banking fees across equity deals and mergers and acquisitions (M&A) reached record levels.
One key growth driver was a boom in initial public offerings (IPOs) which saw companies go public at a head-spinning pace. During that year, B. Riley's revenue and net income surged 72% and 118%, respectively, while the stock reached as high as $91 per share.
Last year was a much different picture. With inflation picking up steam for the first time in decades, the Federal Reserve began raising interest rates rapidly, starting in March 2022. Since then, the federal funds rate, or the overnight lending rate that banks use, went from near zero percent to 5.25% in a little more than a year.
This has resulted in tightening economic conditions, making deal-making and IPOs less appealing for companies. As a result, B. Riley's total revenue fell by 31% while it posted a net loss of $168 million, a sharp reversal from its $438 million profit in 2021.
The reason its yield is so high
B. Riley's dividend currently yields about 10.7%. While some companies have high dividend payouts because of their tax structure, this high yield isn't normal for B. Riley. Before 2021, its average dividend yield was about 2.1%.
Data source: YCharts RILY Dividend
What happened to make its yield shoot up? A big reason for the jump was a steep sell-off in the stock. The slowdown in investment banking and unrealized losses from some of its investments had investors selling the stock most of the year. Since the start of 2022, B. Riley's stock has declined almost 60%.
Because the dividend yield is the annual payout per share divided by the stock price, its yield shot up significantly. Last year the company maintained a dividend payout of $1 per share per quarter or $4 for the year. The high yield can signal two things: Either the stock is cheap, or investors don't believe the payout is sustainable.
Analyzing the sustainability of its dividend
When investing in dividend stocks, you must consider how sustainable the yield is. There are a few metrics you can use to evaluate this. One common metric is the payout ratio. This ratio measures the dividends per share divided by the company's earnings per share (EPS).
As a dividend investor, you want to see that a company's earnings support its dividend payment. Last year, B. Riley's diluted EPS was a loss of $5.11 per share compared to its dividend per share of $4. At this rate, the dividend payout is not sustainable.
Data source: YCharts RILY Dividend Per Share (TTM)
However, you have to consider that the net losses are not necessarily going to continue. In the first quarter, diluted EPS was $0.51, a reversal of its loss of $0.43 per share in the same quarter last year. In the quarter, B. Riley's revenue rose 75% and was boosted by several acquisitions and increased interest income. Still, compared to its quarterly payout of $1, the company will need to continue increasing its earnings to maintain its dividend.
An opportunity for some investors
B. Riley's financial performance is improving, as seen in Q1. However, the high dividend yield may not stick around for too long. If B. Riley cannot improve its bottom line over the next year or two, it may have to cut its payout.
However, if it continues increasing its EPS, the stock price should recover alongside it, which would lower the dividend yield to something more in line with its historical average. It suffered from a slowdown in investment banking but has made numerous acquisitions to make the business more resilient.
If you are a risk-averse investor, you want to see EPS continue improving in the coming quarters to prove the payout is sustainable. However, if you're more aggressive with your investment approach and are willing to ride out short-term volatility, B. Riley presents an appealing opportunity with the potential for long-term growth.
