These small-cap dividend stocks could be millionaire makers

Roland Head highlights two of his top small-cap dividend growth picks.

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Some companies are just a pleasure to write about. Not just because their financial results are usually good. But also because you can rely on their management to provide a balanced and clear view of trading and market conditions.

One company which ticks these boxes for me is Somero Enterprises (LSE: SOM). This £156m firm is a market-leader in the field of concrete-levelling equipment. This is widely used in the non-residential construction market. For example, in a modern warehouse, a perfectly flat and horizontal floor is essential.

Somero’s selling point is not only the quality of its equipment, but the fact that it provides training and 24/7 global support for all customers. After all, when you’ve just poured a concrete floor, waiting until tomorrow for help isn’t much use.

Promising growth outlook

Turning to the numbers, market conditions appear to be strong. Revenue rose by 7% to $42.4m during the first half, while pre-tax profit was 15% higher at $12m. Net cash remained strong at $18.3m, allowing management to increase the interim dividend by 10%.

Somero’s main market is North America, which accounts for around two-thirds of sales. This region was hit by wet weather during H1 and sales fell slightly, from $29.8m to $28.4m. But the group expects a stronger second half and says its customers are reporting project backlogs “well into 2018”.

The group’s H1 sales outside North America logged an impressive 41% gain, rising from $9.9m to $14m. Sales rose in markets including Europe, Latin America and Asia. This growing geographic diversity suggests to me that profits could be more robust than they have been in the past, if the US market slows.

Management remains confident of hitting full-year expectations. Broker forecasts indicate that earnings per share are expected to rise by 10% this year, putting the stock on a forecast P/E of 13 with an ordinary dividend yield of about 3.1%. In my view, Somero remains worth buying at current levels.

A future cash cow?

We’re all familiar with the big online travel booking platforms. But the market is changing and one growth area among younger travellers is hostels, which are springing up in popular destinations all over the world.

Hostelworld Group (LSE: HSW) is an online booking platform focused on the hostel market. It operates in 20 different languages and deals with more than 35,000 properties across the world.

The firm’s half-year results showed a 16% increase in net revenue, which rose to €46.6m. Adjusted pro-forma earnings rose by 38% to €0.11 per share, while the group’s interim dividend was lifted by 5% to 5.1 euro cents per share.

Key target markets seem to have performed well. Group bookings rose by 11% to 3.9m. Some 50% of all bookings now come from mobile devices, up from 43% the year before. And bookings in Asia also grew strongly.

Hostelworld shares currently trade on a forecast P/E of 20. The group’s strong cash generation means that even at this level, the stock offers a forecast yield of 3.8%. Earnings forecasts have already been revised upwards once this year. I believe further gains are likely and suspect that this business could also become an acquisition target.

In my opinion, Hostelworld offers an attractive mix of growth and income. I would consider buying at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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