Never mind the capital, feel the yield.

That might be the temptation for income-hungry investors faced with what seems like a rare opportunity to pick up bumper dividend payouts from some of Britain’s biggest companies.

Based on data provided by Hemscott, no fewer than 14 constituents of the FTSE 350 offer prospective yields of 8 per cent or more. A further 42 provide payouts in excess of 5.5 per cent – in other words, greater than the riskless return from keeping cash on deposit at Bank of England base rates.

With those rates only forecast to fall - most likely by a further quarter-point next month – and the yield on ten-year gilts having dropped to 4.5 per cent, and expected to come under further pressure, the siren call of strong, covered dividends might appear hard to resist, even in the most volatile equity markets. Stray outside the confines of the FTSE 350 and the potential returns are all the more enticing: Pendragon, the debt-laden car dealer, now relegated to the FTSE small cap index, yields 15.7 per cent on Hemscott’s consensus numbers.

But the roster of big payers is dominated by two sectors: housebuilders and banks. Of these, cover – that is, the number of times earnings exceed the dividend, the most common measure of might – tends be higher among housebuilders. The corollary is that this is also the sector where earnings forecasts are most susceptible to downgrades. The sensitivity of profits to falls in house prices means a 10 per cent drop in the latter would wipe out two thirds of the sector’s earnings this year. Some forecasters now discuss the possibility of zero profits or even losses from some of its constituents over the next two years. Potential writedowns of land values – a phenomenon seen only in America this time round – is also mooted.

And banks? Royal Bank of Scotland and Lloyds TSB are commonly seen as the lenders most at risk from dividend cuts, despite cover of two times at RBS on Hemscott’s calculations. Yesterday, Morgan Stanley, the US investment bank, added Alliance & Leicester to that list. The mortgage lender, which, despite this year’s rally on confirmation of bid interest from Spain’s Santander, still yields 7.9 per cent, has cover of less than 1.5 times, the threshold beneath which payouts are deemed to come under threat. However, Morgan Stanley’s concern is more with 2009 dividends than those due for payment in 2008. On those grounds, it expects banks to rally during this year’s bank reporting season as dividend payouts are confirmed, before weakening as investors sell out once they are received.

It is one of the stock market’s oldest lessons that anomalous ratios are a potent distress signal – a high yield is a dangerous yield, runs the saw – and that stocks should never be bought for the dividend alone. The gamble for income-seekers scanning the tables below is whether dividend cuts will be a feature of this year or next - or not at all.

SCi Entertainment

That times are good in video games – spending on consoles and software is at record levels – only makes SCi’s plight look all the poorer. Late on Thursday, Britain’s biggest games publisher emerged with dire news: bid talks had broken down; products would be postponed; SCi will make a full-year loss, the second in a row; and additional working capital is required. The shares fell 54 per cent.

Of these, the sale collapse came as the least surprise. Matching the price expectations of Jane Cavanagh, SCi’s chief executive, who holds nearly 6 per cent, and other large shareholders, such as Robert Tchenguiz and Time Warner, who paid about 500p for their stakes, was always going to be tough. The SCi board, meanwhile, may have been right to brush off a low-ball approach for the company’s intellectual property assets, chief among them Lara Croft. But it must also answer for why SCi became a target.

In recent years, the company has delivered products late and, more often than is healthy, to lacklustre reviews. Most damningly, it failed to anticipate the shift in gaming that has benefited Nintendo – the move to enthuse noncore gamers, including women and older consumers. SCi also seemingly struggled to spot the coming of the most recent generation of consoles, Nintendo’s Wii among them.

The value of the Hitman and Tomb Raider titles to rival developers means further approaches should not be ruled out. But the need for fresh funds ahead of this year’s big releases counsels caution – even at 62p. Avoid.

Paragon Group

Phoenix might seem a more appropriate name. Having been burnt by the housing recession of the early 1990s, Paragon, then called National Home Loans, rose from the ashes by launching a £50 million rights issue.

Thirteen years on, the buy-to-let lender is at it again – except yesterday’s cash call, at £287 million, is more than five times bigger. It is also being struck at an extremely steep discount. At terms of 25 for 1, followed by a 1 for 10 share consolidation, the issue is pitched 90 per cent below Thursday’s closing price. That discount says it all.

Paragon’s preferred option was to secure debt funding to repay its existing £280 million credit facility, but with that door closed, it has had to resort to a rescue refinancing in which existing shareholders are being all but wiped out. The dilution for those who do not exercise their rights is 96 per cent. That contingent will have the option to vote against the fundraising later this month. The alternative is to close Paragon to new business and put its mortgage book into run-off, or find a buyer – although none has emerged so far.

The rights issue solves one problem but still leaves another: Paragon’s exposure to a weakening housing market and the accompanying danger of a rise in bad debts. For that reason, it would be premature to assume that the phoenix of Britain’s last housing downturn can do it again. Avoid.

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