2 ‘hidden’ dividend stocks for income investors

These quality small-cap dividend stock picks could help you boost your portfolio income.

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These quality small-cap dividend stock picks could help you boost your portfolio income.

Hostelworld Group (LSE: HSW) is a relatively unknown company which certainly deserves more attention. The online hostel booking platform is a game changer in the budget accommodation sector as it directly focuses on the low-cost budget accommodation sector that appeals to younger customers.

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Millennials often look for more affordable accommodation as they tend to have less money to spend and have longer holiday stays than their predecessors. This has been driving up demand for hostel rooms, which are becoming increasingly popular alternatives to traditional hotels.

Recent trading conditions have been difficult though. The sector has been facing a number of headwinds following terror attacks in Europe last year, as well as macroeconomic uncertainties and currency fluctuations following the Brexit vote. Still, Hostelworld reported an 18% rise in bookings during the second half of 2016, with the company continuing to generate robust free cash flow.

Leading fund manager Neil Woodford has built up a sizeable stake in the company, with a shareholding of more than 22%, underlining his confidence in the company’s long-term prospects. Hostelworld seems well-suited to his Woodford Equity Income fund as the company has in place a generous dividend policy — it plans to pay approximately 70%-80% of its adjusted profits after tax as dividends.

With this in mind, city analysts expect the stock to offer a prospective dividend yield of 5.8% this year, rising to 6% for next year and 6.2% in the following year. What’s more, valuations are attractive, as Hostelworld trades at forward P/E ratio of 12.2, which analysts expect to decline to just 11.7 by 2018.

Regional property

Another stock that seems set to reward its shareholders with healthy dividends is commercial property company Custodian REIT (LSE: CREI).

Following its IPO in 2014, Custodian has been taking advantage of lower property prices outside of London to expand its portfolio size to 130 properties, up from just 48 at the time of the IPO. Unlike most REITs in the sector, it prefers the sub-£10m regional commercial property market which, due to weaker institutional investor demand, has helped it to build a higher-yielding property portfolio.

Most REITs involved in UK commercial property, including big names such as Land Securities and British Land, trade at a discount to net asset value (NAV) of more than 20%. But Custodian REIT has somehow managed to defy this trend, with the shares currently trading at a modest premium of 7%.

And despite Custodian’s premium to NAV, the stock offers a significantly higher dividend yield than most in the sector. It currently yields 5.7%, beating the sector average of less than 4%. City analysts expect the REIT’s prospective dividend yield to rise to 6.1% by 2017 and 6.5% by 2018. In my view this could be the perfect time to buy for rising dividends and long-term growth.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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