It might come as a surprise to many that stocks on the FTSE 250 are presently (15 April) offering a better return than their larger FTSE 100 cousins. One of these that recently caught my attention is a relatively unknown energy company. Why? Well, it currently has a jaw-dropping yield of 8.7%.

Could this be a rare opportunity to generate a huge dividend income stream? Or could it be a value trap? Let’s see.    

Which one?

Ithaca Energy (LSE:ITH) is a British oil and gas group with stakes in six of the 10 largest fields in the North Sea. In terms of reserves, it’s the largest operator. When considering production, it ranks second.

However, its sole focus is the UK Continental Shelf. This means all of its profit is taxed at an eye-watering 78%. In fact, a look at the group’s 2025 accounts shows an effective tax rate of 110%. But due to complicated rules surrounding the tax treatment of derivative contracts, tax breaks on capital expenditure, and the way in which decommissioning costs are accounted for, much of this is deferred to a later period.

Can it last?

Cash is, therefore, a better guide to the sustainability of the group’s dividend. In 2025, its payout was $498m out of free cash flow of $683m. Clearly, there’s some headroom here but not an enormous amount.

This could explain why during Ithaca Energy’s relatively short life as a public company – it listed in November 2022 – it has already cut its dividend. In cash terms, its 2025 declared payout is 23.7% lower than in 2023.

This is mainly due to the erratic nature of oil and gas prices, which makes the sector one of the riskiest in which to invest. Volatile earnings means the group’s dividend is likely to be difficult to predict as well.

It has a target of returning 20%–35% of post-tax cash flow from operations to shareholders. But the uncertain nature of Ithaca Energy’s business makes it hard to forecast from one period to the next what this actually means. Having said that, even a 50% cut in its dividend from its present level would still result in the stock offering an above-average yield.

Other threats to earnings include an unscheduled interruption to production and higher interest rates. Borrowing costs accounted for 24% of operating profit in 2025.

A growing market

Much to the disappointment of environmentalists, the demand for oil and gas is continuing to rise. And despite the move towards net zero, we will need hydrocarbons for decades to come.

Recent events in the Middle East have also revived the debate about whether the country should be drilling more. Nearly all opposition parties (the Green Party being a notable exception) are united in their view that the UK should be exploiting its own natural resources to help increase energy security.

In my opinion, income investors comfortable with the sector, could consider taking a position but I think it’s probably worth waiting. Hopefully, the current ceasefire in the Gulf will hold. If it does, energy prices are likely to fall. In these circumstances, Ithaca Energy’s share price is likely to come under pressure as well, pushing its yield higher still.