When a firm’s dividend yield rises above 6%, it’s often thought to be a sign of potential problems.
However, the five companies featured in this article all offer a forecast yield of about 10%.
Can these companies can really deliver such high yields, or do painful dividend cuts lie ahead?
Vedanta Resources
Shares in Indian multi-commodity miner Vedanta Resources (LSE: VED) have fallen by nearly 40% since May, driving up the firm’s forecast yield to a remarkable 9.9%. Given that Vedanta is suffering from low commodity prices and has net debt of $10bn, I’d normally run a mile here.
However, Vedanta generated $1bn of free cash flow last year on revenue of $12.9bn. The group has good access to financing, and reported a cash balance of $8bn at the end of March.
Given that the forecast $0.65 per share dividend would cost less than $200m to pay, I doubt that it will be cut.
Infinis Energy
Shares in wind farm operator Infinis Energy (LSE: INFI) fell by 30% in July, after the Chancellor said that onshore wind farm operators would lose their exemption from the climate change levy.
Infinis said that the change is likely to reduce earnings by £7m this year and by £11m next year. The latest broker forecasts suggest that earnings per share could fall to 12.3p this year. That would leave the firm’s forecast dividend of 14.4p per share uncovered by earnings.
In my view, Infinis’s 10% yield is unlikely to remain safe, as this tax change has fundamentally altered the economics of the firm’s business.
Pan African Resources
Small cap gold miner Pan African Resources (LSE: PAF) has reported a post-tax profit every year since at least 2009.
However, according to a trading statement in June, lower gold mining grades mean that earnings per share for the financial year ending June 30 are expected to be between 0.54p and 0.84p, significantly below broker consensus forecasts of 0.96p.
Mining results are now improving, and the firm says that its dividend policy “is expected to be unaffected”. The forecast payout of 0.69p per share dividend gives a prospective yield of 10.8%. I think it’s risky but possible.
Anglo Pacific
Anglo Pacific Group (LSE: APF) earns royalty payments from mines in which it owns a stake. The shares have fallen by 50% since September, as earnings have disappointed.
However, despite forecast earnings of just 2.8p per share in 2015, the firm has committed to a medium-term dividend of 8p per share, moving to a policy of 65% of adjusted earnings in the future.
At 8p per share, Anglo shares provide a 9.7% prospective yield. However, at 65% of adjusted earnings, the yield could be somewhat lower.
GVC Holdings
Isle of Man-based GVC Holdings (LSE: GVC) provides internet sports betting and casino software for a variety of customers. It also owns branded operations such as Sportingbet.
GVC shares trade on just nine times 2015 forecast earnings and offer a forecast yield of 9.1%, rising to 10% in 2016. What’s most impressive is that based on last year’s figures, this payout could be covered by both earnings and free cash flow, making it quite safe.
However, GVC is in the middle of negotiating a £1bn offer for Bwin.party Digital Entertainment. It’s possible that this financial commitment could constrain GVC’s dividend payments.