2 small-cap dividend-growth stocks I’d buy with £2,000 today

These two small-cap stocks could generate high income returns in the long run.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With inflation remaining at a relatively high level, dividend growth stocks could become more in demand among investors. After all, obtaining an inflation-beating yield may become more challenging, and companies that are able to raise shareholder payouts at a fast pace could be rewarded via a higher share price.

Of course, there are a number of large-cap stocks that offer upbeat income growth prospects. However, some smaller companies could also be of interest to income-seeking investors. Here are two prime examples.

Solid growth

Reporting on Wednesday was manufacturer of photonic components and systems Gooch & Housego (LSE: GHH). The company has been performing in line with management expectations and has benefitted from positive overall market conditions in the first four months of the financial year.

There has been exceptional demand for critical components used in microelectronic manufacturing. And while there has been a slowing in demand for high reliability couplers since the start of the year, this is expected to come back in the second half of the year.

With an order book that has reached record levels, the outlook for the stock remains positive. In fact, it is forecast to post a rise in earnings of 11% in the current year. This follows a strong trend of growth in previous years, with the company generating an annualised bottom-line growth rate of 12% during the last five years.

In terms of its dividend prospects, Gooch & Housego’s coverage ratio of 4.9 suggests that it could afford to pay out a significantly higher proportion of profit as a dividend. This could help to lift its yield of 0.8% to substantially higher levels. And with the company having a reliable track record of growth, its shares could continue to rise following their 23% growth in the last year.

Uncertain prospects

One smaller company which has endured a difficult recent period is beverages company Nichols (LSE: NICL). The producer of Vimto has experienced supply issues in the Middle East that have caused its operational and financial performance to come under pressure versus expectations. As such, the stock is forecast to post a rather lowly 4% rise in earnings in each of the next two financial years. This is considerably lower than the double-digit growth which has been delivered in recent years.

With the Nichols share price having fallen 6% in the last three months, there could be a wider margin of safety on offer than is normally the case. The business continues to have a bright long-term future, although its near-term performance could be relatively volatile.

With its dividend being covered 2.1 times by profit, the company appears to have significant scope to raise payouts to its shareholders over the long run. While it may only yield 2.2% at the present time and lacks the stability of previous years, the total returns on offer may be exceptionally high.

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.

Peter Stephens owns shares in Nichols. The Motley Fool UK has recommended Gooch & Housego and Nichols. 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.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

1 discounted US stock for me to buy for the cybersecurity revolution!

This AI-powered cybersecurity company's beating its rival technologies, and a recent share price drop may have just created a buying…

Read more »

Investing Articles

Buying 1,019 shares of this FTSE 100 monopoly could earn me £2,284 in passive income

National Grid’s monopoly status makes it a popular passive income stock. But investors shouldn’t underestimate the risks that come with…

Read more »

Investing Articles

£5k in savings? Here’s how I’d aim to build a rising passive income of £5,500 a month

Harvey Jones invests in FTSE 100 dividend stocks with the aim of generating a growing passive income to fund his…

Read more »

Investing Articles

Are these 2 legendary dividend stocks worth buying and holding until 2030?

Zaven Boyrazian explores two of the UK's most legendary dividend stocks with tremendous track records. But are they good long-term…

Read more »

Investing Articles

I’d listen to Warren Buffett’s advice and buy undervalued shares today

Warren Buffett’s focus on quality at a reasonable price has proven to be a highly lucrative strategy that other investors…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

How I’d aim to turn an empty ISA into a £50k second income!

Zaven Boyrazian outlines how investors can target a £50,000 second income starting with a brand new ISA while also keeping…

Read more »

Investing Articles

Up 202%! This hidden FTSE gem has outpaced the Rolls-Royce share price and is still climbing!

The Rolls-Royce share price may have outpaced every FTSE 100 rival over the last couple of years but Harvey Jones…

Read more »

Investing Articles

How I’d invest my first £1,000 in a SIPP

Investing the first £1,000 in an SIPP can be a daunting process, especially for new investors. Zaven Boyrazian explains what…

Read more »