Are these mammoth 6% dividend yields under threat?
Every investor loves receiving dividends but finding dividend stocks that won't let you down is tough. Indeed, it is not as simple as just buying the stocks with the highest dividend yield on offer, you need to conduct research into the sustainability of the payout, profits, and growth for the long term, to establish if the yield is sustainable.
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With this in mind, here is the lowdown on three mammoth 6%-plus dividend yields.
A diamond in the rough
Still reeling from the announcement that regulators are planning to crack down on the CFD market, shares in IG Group(LSE: IGG) currently support a dividend yield of 6.1%.
At present, the payout is covered 1.4 times by earnings per share, which looks adequate today but City analysts expect earnings per share to fall 11% for the fiscal year ending 31 May 2018, and as a result dividend cover will fall to 1.2 times. Also, it's not known how damaging the regulatory crackdown will be to IG's revenues so further earnings downgrades could be on the horizon. Right now the shares trade at a forward P/E of 11.2.
Unfortunately, even after taking IG's attractive dividend yield and undemanding valuation into account, considering the uncertainty surrounding the firm's outlook, I wouldn't buy shares in IG for income just yet.
Sector disappointment
Taylor Wimpey (LSE: TW) is one of the UK's leading homebuilders, and the shares are suffering from investors' continued scepticism towards the sector.
Over the past four years, earnings per share have grown from 4.6p to 17.7p and earnings per share growth of 4% is expected for 2017. The company pays the majority of earnings back to shareholders via dividends and during 2017 is expected to pay out 13.8p per share to investors, for a yield of 7.9% at current prices.
As Taylor's dividend strategy revolves around one large payout rather than several fixed smaller payouts, I'm optimistic about the company's dividend prospects.
An annual special dividend gives the company more financial flexibility and is likely to make the dividend more sustainable as the company will only pay out as much as it can afford rather than following a fixed dividend timetable.
Cheap yield
Investors have always given Connect (LSE: CNCT) a wide berth although the company has consistently beaten or met market expectations
Over the past five years, pre-tax profit has grown steadily from £36.6m to £42m and earnings per share have risen from 17.9p to 19.8p. Over the same period, management has increased the company's dividend payout from 7.8p to 9.5p per share and the yield has averaged 6% per annum.
Today, shares in Connect support a dividend yield of 6.8% and the payout is covered 2.1 times by earnings per share. The shares trade at a forward P/E of 7.6. Based on these figures, plus the company's history of meeting the City's expectations for growth, Connect's dividend looks attractive to me.
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Rupert Hargreaves 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.
