Dividend stocks can provide an investor with a great source of passive income. Although the FTSE 100 average yield is 3.03%, there are countless stocks outside the main index with higher yields. I spotted one with a generous percentage yield that has a strong foreacast. So what’s the game plan?

An oil gem

I’m talking about Ithaca Energy (LSE:ITH), one of the largest independent oil and gas producers in the UK North Sea. Its portfolio includes interests in major fields such as Rosebank, with the enlarged business benefiting from its transformational combination with Italian energy company Eni’s UK upstream operations. In simple terms, Ithaca produces oil and gas, sells and aims to return a chunky portion of the resulting cash to shareholders via dividends.

It isn’t difficult to see why the shares have risen roughly 27% over the past year. The spike in oil prices due to the conflict in the Middle East has provided a higher selling price for Ithaca’s end product. Another positive factor is better operational execution.

Production averaged 119,000 barrels of oil equivalent per day in 2025, before finishing the year at around 148,000. Strong production has continued in 2026, averaging 128,000 barrels per day in H1, in results released earlier today (19 August).

Money talks

Now let’s get onto the dividend. Ithaca returned $500m for 2025 and has today raised its 2026 dividend guidance to $500m-$530m. Even though the yield’s important, the fact that the actual dividend per share is increasingly is a good sign for sustainable future income.

The current dividend yield is 8.42%, and although some get worried by such a high yield, I think there are good reasons this payout could prove more sustainable than they think. Rather than promising a fixed dividend regardless of conditions, Ithaca now targets shareholder returns of 20%-35% of post-tax cash flow from operations, with 30% targeted for 2026. That means distributions can flex alongside commodity prices and cash generation.

The company also has low debt levels and almost $1.6bn of avilabile liqudity, so I don’t see cash flow being a problem. Looking ahead, with the projected dividend per share of $0.302 for next year, this would translate to a yield of 8.44%, assuming the current share price stays the same.

Risks to be aware of

Trying to predict future dividends is hard. The share price could rise or fall between now and 2027, meaning the actual yield will be higher or lower than estimated. Ithaca could also struggle with unplanned higher expenses, acting to reduce the future income payments. At a company level, UK politics is a significant risk. The North Sea has endured repeated changes to taxation and regulation, making Ithaca heavily exposed to changes here.

Yet on balance, I think this is a great dividend share that isn’t showing a lot of red flags despite the high yield. I’m seriously thinking about buying it for my income portfolio. For investors who agree with my view and are happy with the risks, it could be considered.

Should you invest £5,000 in Ithaca Energy Plc right now?

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Jon Smith does not hold any positions in the companies mentioned