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

A key target for investing returns is to keep them ahead of inflation, and these two stocks could do just that.

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Shares in Xaar (LSE: XAR) climbed 15% in morning trading Wednesday, after the inkjet technology developer’s 2017 results beat expectations.

Profit did fall, as predicted, but adjusted pre-tax profit only dipped modestly from £19.5m to £18m, with diluted EPS down just a smidgen from 21.2p to 20.7p.

The company has been suffering from a falloff in its ceramic tile decoration business and is in something of a transformation period, but it’s seeing revenue growth from new products. In fact, the seven new products launched in the last two years, plus the acquisition of Engineered Printing Solutions, brought in 80% of 2017’s total product revenue.

Overall revenue actually rose slightly, by £3.9m to £100.1m, and I see that as a sign that Xaar really is turning the corner since a profit warning sent its shares tumbling back in November — as, apparently, does the market.

Turnaround

Looking at the firm’s new products, it saw a “strong performance” from its 1201 thin film printhead, with a two-year distribution agreement for 90,000 units in the bag. And there was good progress from the 5601 thin film printhead development too, with the design frozen and the first development kits shipped to eight partners.

Analyst forecasts are a bit up in the air at the moment, with a 40% drop in EPS indicated for 2018. But I can see that being adjusted more optimistically now, and the 46% EPS rise pencilled in for 2019 could be edging closer.

The 2017 dividend was lifted by only 2% to 10.2p, to yield 3.8% on the previous close, but its growth is expected to accelerate in the next couple of years. And over the medium term, it’s well ahead of inflation, up 27.5% in four years.

Back in front?

Speaking of turnarounds, the past five years haven’t been good to Empiric Student Property (LSE: ESP) shareholders. Though the price was riding high in September last year, first-half results from the real estate investment trust (REIT) were not taken well, and the share price has since slumped. At 87p as I write, the shares have gone nowhere overall since flotation in 2014 — but there’s at least been around 9% in dividends in total.

After an operational review in November, the trust cut its dividend target for 2017 from 6.1p per share to 5.6p, and it’s just announced an actual payment of 5.55p. At the time, Empiric reckoned it had grown too fast and overstretched itself, and on Wednesday confirmed that its 2017 operating margins and dividend cover were “reduced by a number of financial and operational inefficiencies within the Group and its supply chain.

Dividends adjusted

The target dividend is now set at 5p per share for 2018, which will disappoint some. But I see it as a sensible step while the company refocuses, and one that will help it achieve progressive dividend rises above inflation in the long run — especially when the current shakiness in the property market starts to settle.

Meanwhile, the company’s portfolio valuation stood at £890.1m at 31 December, up from £721.3m a year previously, with year-end net asset value (NAV) per share at 104.37p.

That puts the shares on a discount to NAV of nearly 17%. REIT shares typically trade at a discount, but I think that gap is too wide, and I see Empiric Student Property as a good pick to beat inflation over the next decade.

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 considered so you should consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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