2 ‘secret’ income stocks with risky dividends

Royston Wild looks at two shares with perilous income prospects.

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Sinking demand for conventional video games is putting Game Digital (LSE: GMD) in severe peril.

The electronics retailer saw like-for-like sales slump 6.3% during the 23 weeks to January 7, according to its latest financials, with underlying sales falling 1.6% during the Christmas period that is so important for the sector.

Not only does Game Digital continue to see sales sink as the Xbox and PlayStation consoles age (it is four years since the latest incarnations of these units were brought out), but releases of new software titles have also disappointed more recently, the company has noted.

The City expects these problems to translate into further bottom-line woe in the medium term at least, and analysts predict that Game Digital will suffer a 61% earnings decline in the year to July 2017, worsening from the 52% drop punched last year.

And this is anticipated to result in yet another cut to the dividend. The retailer scythed the full-year reward for fiscal 2016 to 3.42p per share, down from 14.7p in the prior 12-month period. And the total reward is anticipated at 3.1p for the current financial year.

However, I believe even this uninspiring projection is in danger of disappointing. The proposed reward is covered just 1.1 times by proposed earnings (falling some way short of the widely-regarded safety yardstick of two times).

And the structural changes that are smashing demand for Game Digital’s goods look like they have much further to run as gamers get their fixes via platforms like Steam or on their smartphones, putting dividends in the longer term on a shaky footing also.

Therefore I reckon income investors should shun a jumbo 7.2% dividend yield and shop elsewhere.

Currency calamity

Money maker De La Rue (LSE: DLAR) is also a high-risk dividend stock in an increasingly-cashless world.

Despite expectations that earnings will slide 10% in the year to March 2017, the number crunchers still expect De La Rue to lift the dividend to 25.2p per share. What’s more, the anticipated reward is also covered a mere 1.7 times by predicted earnings.

Glass-half-full investors may be drawn in by a chunky 3.9% yield. And there are predictions of a 12% earnings uplift in fiscal 2018 that is expected to push the dividend to 25.6p, yielding 4%.

But I am less than assured by these optimistic forecasts. Revenues at De La Rue stagnated during April-September, at £189.5m, while pre-tax profit tanked 31% to £17.2m. Furthermore, a flat order book suggests that sales are not about to pick up — the noteprinter’s 12-month order book registered at £409m as of September versus £405m a year earlier.

De La Rue has already been forced to cut the dividend once in recent years, the firm slicing the payout to 25p in fiscal 2015 from 42.3p in prior periods. And I believe further heavy reductions should be expected.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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