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 its 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 Digitals 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 Games 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, its clear that investors shouldnt rely on Games current dividend yield of 13%. Nonetheless, even if the payout is cut by 40%, this will still leave Games shares yielding 7.4%.
A special dividend on the cards?
For the year ending 31 December 2015, Direct Line returned 48p per share to investors for a dividend yield of 11.7%. Part of this cash return followed the companys sale of its international insurance arm. Management decided to return the extra cash from this deal to investors by a special dividend. And theres reason to believe that another hefty special dividend could be on the cards for Direct Lines 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 insurersrisk-based capital coverage ratio was155.9% 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 Lines 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. GVCs 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 GVCs 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 GVCs earnings. City analysts are forecasting pre-tax profit growth of 100% for the enlarged group this year and the companys dividend payout ratio should return to its previous level after the two gaming companies have completed their integration.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended GVC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.