Looking for dividends? I think these secret small-cap stocks look great value

Paul Summers picks out two stocks that could be about to appear on a lot more investors’ radars.

| 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.

sdf

The UK stock market is an ideal place for those looking to generate a second income stream from their savings.

Understandably, most private investors gravitate towards the biggest and best-known companies (think Lloyds Bank, Royal Dutch Shell and GlaxoSmithKline), either through buying their shares directly or by purchasing a fund that focuses on holding a selection of these giants.

Today, however, I’ve picked out two far smaller businesses that not only have great income credentials but also, I suspect, offer the possibility of decent capital growth.

Focused on 2020

Based on recent trading, you might wonder why I’m positive on “image capture and content creation solutions” provider (that’s camera accessories, supports, prompters, monitors and lighting to you and me) Vitec Group (LSE: VTC).

Results for the first half of 2019 weren’t particularly inspiring. The US/China trade war and “some disruption to the photographic market” left revenue pretty much flat at £184.2m compared to the previous year. Pre-tax profit fell almost 16% to £16.6m and net debt increased to £108.4m from £43m, partly as a result of acquisitions.

In spite of this, it’s important to highlight that Vitec made no changes to its FY19 guidance. At 14%, adjusted operating margins also remained decent and in line with the company’s mid-teens-digit target.

By far the biggest positive in my view, however, was the fact that wireless chip maker Amimon (purchased in November last year) has now been fully integrated. This means Vitec’s plan to launch wireless video products into the broadcast sports market next year is on track. This development, coupled with the company being heavily involved with the Tokyo Olympics (as well as the US Election), leads me to suspect that the current valuation of 14 times earnings could turn out to be rather cheap by next year.

And the dividends? The 3.1% yield might appear very average, but it’s been consistently hiked over the years — exactly what those looking for regular income should be searching for. What’s more, this year’s cash returns should be covered well over twice by profits.

Galloping dividends

A second stock that I think warrants further investigation is RM (LSE: RM) — a company that supplies products and services to education markets, both here and abroad. 

This small-cap’s shares have been in excellent form over the last 12 months, rising a little over 50%. Based on July’s interim results, I think there could be more good news ahead.

Although revenue rose only 1% (to £95.5m) thanks to “a difficult UK schools market“, international sales rose 33%. Adjusted operating profit also jumped 17% to £9.7m, helped in part by improvements in RM’s Results and Education divisions. Margins rose to 10.2% from 8.8% and net debt dropped by £2.2m to £21.2m. Lots of good numbers there.

The great thing about all this is that RM’s shares can still be picked up for just 11 times expected earnings. Considering the company generates high returns on capital employed on a consistent basis, that looks rather cheap to me. 

Like Vitec, RM’s 3% yield isn’t exactly worth writing home about on its own. Look underneath the bonnet, however, and you’ll discover that the business has doubled its total cash return since 2013 and is expected to grow this amount by another 10% in FY20. Forget the sky-high yielders elsewhere in the market — this is what should get dividend hunters salivating.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Vitec Group. 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

piggy bank, searching with binoculars
Investing Articles

Up 82% in 12 months, this dividend stock still has a 5.5% yield!

This dividend stock has given investors growth and a strong yield in recent years. Dr James Fox explores whether there’s…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Over the last 3 years, this British investment fund has delivered nearly double the return of the FTSE 100

Thanks to his specific investment approach, this British fund manager has beaten the FTSE by a wide margin over the…

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

Analysts reckon the Vodafone share price is still undervalued!

Our writer’s been looking at the latest Vodafone share price forecasts and assesses how the group’s performed against the targets…

Read more »

Investing Articles

Considering a Stocks & Shares ISA in 2025? Make sure to avoid these pitfalls

Mark Hartley outlines a few basic tips for investors to ensure opening a first-time Stock and Shares ISA goes as…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

What will take the Lloyds share price beyond 80p?

The Lloyds share price has leapt by 40% in the last six months. It's also soared by 135% in five…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

Want to become an ISA millionaire? Here’s one way to target stock market riches with £500 a month

Making a million pounds or more in an ISA doesn't have to be a pipe dream. Here's how a mix…

Read more »

Light bulb with growing tree.
Investing Articles

Could the ITM Power share price be set to soar like Rolls-Royce?

The Rolls-Royce share price has risen 10-fold since 2022. Could this under-the-radar UK growth stock deliver similar returns in the…

Read more »

Close-up of British bank notes
Investing Articles

Turn £20k into a £1k second income this summer? Here’s how!

With £20k, our writer thinks a portfolio of blue-chip shares could help an investor earn a four-figure second income each…

Read more »