Stocks that support a dividend yield of more than 5% are rare and, more often than not, these equities support such a high yield because the market doubts their ability to sustain the payout.
However, not all dividends are created equal and sometimes all it takes is a bit of digging to discover that a suspect 7% or 8% yield is actually more sustainable than the market might think.
SCS Group(LSE: SCS) is an excellent example of this. At the time of writing, shares in SCS support a dividend yield of 9.5%, covered one-and-a-half times by earnings per share. SCS's yield has spiked to this level over the past 12 months as investors have dumped shares in the company following Brexit. It seems the market is concerned about the firm's ability to be able to survive, grow and sustain its dividend payout if or when Brexit starts to impact the UK economy.
Still, as of yet the company and its management don't seem to be as concerned about SCS's future as the rest of the market and the figures support this view. For the 26 week period ending 28 January, the company reported a cash balance of £36.8m and a cash inflow from operating activities of £22.5m. Management was so impressed with the company's performance that it has decided to hike the interim dividend payout to 4.9p for 2017 from 4.7p. Based on trading performance for the first half of the fiscal year, management expects the company to hit city forecasts for earnings per share of 22p and a pre-tax profit of £11.5m for the year to 31 July 2017.
Based on all of the above, I believe the market is wrong about the sustainability of SCS's dividend.
Unfortunately, I don't hold the same opinion of Laura Ashley(LSE: ALY). Current figures suggest shares in Laura Ashley will yield 9.1% this year and 10.5% for 2018. However, the company has already announced a cut to its interim dividend payout of 50%, from the predicted 1p per share to 0.5p and it is possible management will take the same action with the final payout (from 0.5p to 0.25p).
If management does cut the final payout, the shares will only yield 5.3%. As the company's earnings per share are expected to fall by 35% this year to 1.2p, the company's hand may be forced as it looks to preserve cash in the hostile retail environment.
City analysts are expecting a slight increase in earnings per share for the following year, but I'm not inclined the trust these optimistic forecasts. With all retailers currently struggling to drive sales growth, it looks as if the path of least resistance for retail earnings going forward is only down.
The bottom line
So all in all, Laura Ashley may look like a high yield dividend champion at first glance, but on further inspection the company's dividend yield is on track to fall by as much as 50% this year. SCS, on the other hand, looks to be a much better income investment.
On the road to a million
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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.