GameStop (NYSE:GME) dividend investors have had a great couple years. Their quarterly payout has more than doubled since being initiated in 2012. And the stock is up 80% in that time, providing some strong capital gains over the market.

GME Chart

GME data by YCharts

Of course, it wouldn't be realistic to bank on the same level of dividend and capital appreciation outperformance over the long term. With that in mind, let's look at two key pieces of GameStop's dividend outlook. 

Share repurchases are preferred
Even though management has boosted the dividend three times in the past two years, GameStop has shown a strong preference for returning capital to shareholders through stock buybacks. In the two fiscal years since the dividend was started, the company spent roughly three times as much cash on repurchases as it did on payouts. 

  FY2013 FY2014
Dividends $102 $131
Share Buybacks $410 $260

Spending in millions. Source: GameStop financial filings.

GameStop has been opportunistic about its buyback spending, ramping up purchases when the stock was relatively cheap and throttling back as it increased in price. The heaviest spending occurred in 2012 when shares were valued at just 7 times trailing-twelve-month earnings. Management repurchased 20 million shares that year at an average cost of $21 a piece.

The stock isn't that much of steal right now at $42 a share and sporting a P/E ratio of 13. But GameStop's valuation is still comfortably below the broader market's, and so it remains a reasonable target for any excess cash. 

That stock-buying binge has also sliced the number of outstanding GameStop shares by 30% in the last five years. The big benefit for investors in that shrinking count has been an acceleration of per-share earnings. Last quarter, for example, net income rose a solid 133% year over year, but earnings per share improved by 144%.

The company has no immediate plans to end the stock spending, either. Management is targeting a buyback outlay this year of up to $300 million, with dividend payments only projected at half that total. Yes, GameStop's executives have shown that they aim for an above-average yield for the stock. But share repurchases will likely stay the major avenue for capital returns for the time being.

Amply covered by cash
On the plus side, dividend investors can be confident that GameStop is generating enough cash to cover its current yield, with plenty of growth to fund future payout hikes. The company had $760 million in operating cash flow last year, up 25% over the prior year. 

GME Cash from Operations (Annual) Chart

GME Cash from Operations (Annual) data by YCharts.

By comparison, dividend payments were just $131 million last year. That works out to 20% of annual cash flow and less than 40% of earnings.  

Looking ahead, next year's dividend boost will depend significantly on just how well GameStop does this holiday season. The retailer traditionally books a huge portion of its annual sales in the fourth quarter, and it has to bet heavily on a number of games and hardware devices to ensure it has the right level of inventory for the crush of shoppers. If management predicts that demand correctly, and if GameStop continues to lead in the market, then investors should expect to see strong business results. That in turn would make it likely that shareholders receive a dividend raise comparable to last year's 20% boost. Otherwise, management might be forced to provide a weaker increase and keep directing extra cash into shrinking GameStop's outstanding share count.