Regular income from dividends can revolutionise a portfolio. They can provide income when the stock market is falling or add the icing on the cake when it’s hitting a new high.
However, trying to find dividend yields that are both above-average and sustainable is difficult. For example, Game Digital (LSE: GMD), Direct Line (LSE: DLG) and GVC Holdings (LSE: GVC) all support dividend yields of more than 8%. But the question is, are these payouts sustainable?
Heading for a cut
With a dividend yield of 13%, Game Digital’s shares support one of the best yields on the market. That said, the current payout is only covered 1.3 times by earnings per share and City analysts expect the dividend to be cut by around 40% this year. This forecast is based on the fact that Game’s sales are sliding, and during December the company warned that first-half profits would be around a third lower than the same period last year.
With this being the case, it’s clear that investors shouldn’t rely on Game’s current dividend yield of 13%. Nonetheless, even if the payout is cut by 40%, this will still leave Game’s shares yielding 7.4%.
A special dividend on the cards?
For the year ending 31 December 2015, Direct Line is set to return 41.5p per share to investors for a dividend yield of 10.7% according to City analysts. Part of this cash return followed the company’s sale of its international insurance arm. Management decided to return the extra cash from this deal to investors by a special dividend. And there’s reason to believe that another hefty special dividend could be on the cards for Direct Line’s shareholders this year.
Specifically, management has stated that it will consider returning excess capital to shareholders when it reports full-year results for 2015 on 1 March. Direct Line has a cash-rich balance sheet and the insurer’s risk-based capital coverage ratio was 155.9% at the end of June. Management is targeting a coverage ratio of 125% to 150%. Anything above that level can be considered to be excess capital, which could be returned to shareholders. Excluding any special payouts, Direct Line’s regular dividend yield is forecast at 5% for this year.
Acquisition to boost profits
Finally GVC Holdings, the controversial gaming company that likes to pay out most of its profits to shareholders. GVC’s five-year average dividend yield is around 10%. However, City analysts expect the company to slash its dividend payout by more than 50% this year following a 23% fall in earnings per share. This lower earnings per share figure is largely to do with the higher number of shares in issue following GVC’s takeover of Bwin.party last year. The lower payout will also mean that the payout cover will increase from 1.3 to 2.3 times.
Over the long term however, this deal should only boost GVC’s earnings. City analysts are forecasting pre-tax profit growth of 100% for the enlarged group this year and the company’s dividend payout ratio should return to its previous level after the two gaming companies have completed their integration.