Dividend stocks appeal to those of us seeking dependable income, with many investors drawn to the stocks with the highest dividend yields. But for investors relying on regular dividends for living expenses, consistency can be just as important as the headline yield.
So before you invest in the stock because of its high dividend yield, it’s crucial to examine whether the company is likely to sustain such high dividend payout levels.
Profit warning
Consumer electronics retailer Dixons Carphone (LSE: DC) may be one stock that has recently caught the attention of dividend investors, after shares in the company plunged sharply following a profit warning on Tuesday.
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The shares have since recovered slightly, but they’re still trading at 17% below their value of just a week ago. As such, the dividend yield of its shares has risen sharply, and currently stands at 5.9%. Could this be an opportunity to buy the stock on the cheap, or should you steer clear?
Dividend unchanged
Reassuringly, the company said that it expects to pay an unchanged full-year dividend of 11.25p, despite warnings that pre-tax profits could fall by as much as 21% in the coming year. What’s more, its dividend policy is backed up by resilient free cash flow generation and a strong balance sheet. Net debt is expected to improve to around £250m by the end of the 2017/18 financial year, demonstrating the company’s improved cash conversion.
Certainly, the company faces tough retail headwinds, amid weak consumer confidence in the UK and a shift towards online shopping, but it’s not all doom and gloom. The company continues to see growth in revenue and profits in its international business, and has a plan to fix its problems in the UK.
Dixons has a new leadership team in place, has big plans to address its historic underinvestment in its stores and improve its cost efficiency in the mobile market. But despite the opportunity for a turnaround in its financial performance, valuations are undemanding. On top of an attractive dividend yield, shares in the retailer trade at a tempting forward price-to-earnings ratio of just 7.4.
Asset manager
Elsewhere, Jupiter Fund Management (LSE: JUP) is another stock that deserves a closer look from income investors.
Shares in the asset manager have come under heavy pressure after recent outflows from the company’s Dynamic Bond fund. What’s more, the recent weak performance at the fixed income fund has also raised concerns that the company has become over-reliant on a small number of funds.
Re-rating
Jupiter has, until recently, been one of the fastest-growing asset managers in terms of growth in assets under management, so a re-rating of its shares appears to have been well-deserved.
And despite the concerns, earnings for the firm are still expected to grow steadily over the next few years, as Jupiter seeks to diversify away from its popular funds and push ahead into international markets, particularly in Asia. With City analysts forecasting earnings per share growth of 2% in 2018 and 5% in the following year, I’m confident about the sustainability of its dividends and its outlook going forward.
Including special dividends, City analysts expect dividends per share of 33.2p in 2018, giving prospective investors a forward dividend yield of 7.3%.
