3 Reasons Why GameStop is Not a Top Dividend Stock

Sporting a hefty dividend yield of 3%, video game retailer GameStop (GME -3.38%) ranks in the top fifth of all stocks in the S&P 500 by that metric. But it's the dividend's growth rate that really grabs income investors' attention: GameStop's quarterly payout has more than doubled since late 2012, to over $0.30 a share. 

Still, despite those impressive figures, the stock has a long way to go before you could call it a top-quality dividend payer. Here are the key reasons why.

1. Insufficient dividend history
The company only began sending dividend checks to investors in February 2012. Shareholders have received a solid payout raise every year since then.

Source: Company filings. Projected payout for 2014.

But that's really not enough time to evaluate the strength of a payout. Dividend stalwart Procter & Gamble sits on the other end of the spectrum, and has boosted its dividend in each of the last 58 consecutive years. In contrast with GameStop's history, that period includes dozens of economic booms and busts. It is also more than enough to qualify the consumer goods giant as a Dividend Aristocrat, which requires 25 straight years of payout boosts.

GameStop is off to a good start as it approaches its fifth yearly raise. But dividend investors need a much longer history to fully judge a payout.

2. Inconsistent earnings
The dividend also gets penalized for the fact that the business that sustains it is prone to big profit swings. After all, GameStop took a major loss just last year -- to the tune of $2.13 a share -- as the video game industry sank to the bottom of its last cycle.

Source: Company filings.

The good news for shareholders is that profitability is now surging, and should set a new high-water mark in 2014. Still, any business that can lose or gain $300 million in a given year just can't qualify as a top dividend stock.

3. Concentrated product lineup
Finally, GameStop is heavily exposed to a single, highly cyclical industry. That focus on the video game market is great for the business right now, as the popularity of the new generation of consoles ignites sales and profit growth. For example, GameStop just booked a whopping 22% gain in comparable-store sales last quarter even as most retailers are struggling to find any gains at all. 

But that focus also leaves the company extremely vulnerable to industry downturns. Long-term shareholders remember that GameStop suffered through two straight years of comps declines through 2012.

To its credit, management has made progress in diversifying the business into additional product lines. Consumer electronics and wireless services, for example, weren't a part of GameStop's model just a few years ago. Now those lines account for about 7% of sales, up from 4% in 2013. That trend is good news for investors as it makes a repeat of 2012's big loss less likely when this console generation meets its inevitable decline. But for now, GameStop's dividend isn't backed up by a diverse revenue stream.

The takeaway
There are some good reasons to consider buying GameStop stock, particularly as it benefits from the biggest holiday season yet for new blockbuster video game launches. But investors looking for top-notch dividends should aim for a longer-lived payout that has a more established business behind it.