I love a good income stock, especially one with a high dividend yield. It can be a great way to target long-term passive income.

Of course, the yield itself doesn’t guarantee a golden goose. If the stock price is falling off a cliff, then no amount of dividends can save it.

That’s why I’m amazed by the investment and brokerage firm TP ICAP (LSE: TCAP). Both its price and dividends have been increasing rapidly lately!

Providing financial services to companies in Europe and beyond, it operates across multiple asset classes and geographies. Its broad range of products and services add a level of diversity and defensiveness to the stock.

The shares are up 42% in the past year and since Covid, the total dividend has more than doubled from 6.99p to 14.8p. Based on my calculations, an investment of £10,000 just three years ago would have grown to over £27,000 today (with dividends reinvested).

But past performance is no indication of future results, so I want to know if it can continue that performance.

TP ICAP’s share price surge

Strong financial results are likely the key drivers behind the stock’s recent price gains. Earnings have beat analysts’ expectations for the past four years running and look set to do so again in the FY2024 results next week (11 March).

In 2021, income took a hit, falling to £5m and dragging the net margin below 1%. But a recovery was swift, with the company turning a £91m profit in H1 2024, bringing the net margin up to 8%.

Revenue has also grown steadily since Covid, from £1.8bn to £2.2bn.

Dedicated to dividends

Prior to Covid, TP ICAP’s total dividend had stood steady at 15p per share for eight years. This was slashed in half in 2020 but rapidly recovered, now likely to be 15p per share again in the 2024 final results.

But can it sustain that level?

The payout ratio is already above 100%, meaning it’s paying out more than it’s earning per share. Strong earnings may bring that down after the next results, but for now, it’s a risk to consider.

In addition, its £1bn debt position is no small matter. It has come down 20% since 2022 but still equates to half its market cap. If earnings slip, there’s a risk it may need to cut dividends to prioritise debt repayments.

Looking ahead

When a stock’s share price has been rising consistently for some time, it can become overvalued. But for TP ICAP, this isn’t necessarily the case.

With earnings forecast to rise 63% next year, its forward price-to-earnings (P/E) ratio is 11.9 — in line with the industry average. That tells me the price growth will probably taper off from here and grow only moderately in the coming year.

Analysts expect growth of around 14.8% on average in the coming 12 months, which fits in with my above valuation. That puts the focus on dividends. If they’re increased beyond 15p per share in next weeks results, it could push the yield even further above 6%.

That would make the stock attractive for income investors and one worth considering as part of a dividend portfolio.