I think these cheap small-cap dividend stocks are cracking buys in this market crash

Looking for income in these troubled times? Dividends look safe at these market minnows.

| 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.

It’s understandable if many investors are steering well clear of small-cap stocks right now. The share prices of minnows have a tendency to be more sensitive than established stock market juggernauts from the FTSE 100, even at the best of times. During a crisis like this, the volatility dial is turned up to 10.

That’s not to say there aren’t any great stocks available for those willing to look at the lower end of the market spectrum. That’s particularly so for patient dividend investors. 

Hot stock

While clearly not taking into account trading during the coronavirus outbreak, today’s full-year results from Strix (LSE: KETL) demonstrate how solid it is. The company is a kettle safety control designer, manufacturer and supplier and also produces water filtration products.

Revenue climbed 3.3% to £96.9m in 2019. And the AIM-listed firm continued to boast huge market shares in regulated (73%) and less regulated markets (34%). Pre-tax profit moved 3.4% higher to £30.2m, in line with market expectations. 

Away from the headline numbers, it’s pleasing to see that Strix continues to improve the health of its balance sheet.

It saw investments such as the building of a new factory in China and the acquisition of assets from clean water business HaloSource. But its net debt was still cut to £26.3m, a roughly 4% improvement from the end of 2018.  

Regarding the coronavirus, CEO Mark Bartlett said the small-cap’s manufacturing operations in China had improved. He said they had “recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand”. That should be hugely reassuring for those (like me) already holding the stock. 

As a further sign of confidence in its outlook, Strix stated that it would propose a final dividend of 5.1p. This would bring the total cash return for 2019 to 7.7p per share, a 10% increase on 2018’s payout and covered healthily by profits. Taking today’s share price rise into account, that gives a trailing yield of 6%. Hikes to the cash returns also look likely in the future.

Taking all this into account (and allowing for some bias), I continue to think Strix is an excellent income stock to tuck away for the long term. In fact, it looks something of a steal given a valuation of just 8 times forecast earnings!

Counter-cyclical

Another minnow boasting defensive qualities and a decent dividend yield is insolvency specialist Begbies Traynor (LSE: BEG).

Considering the impact the current crisis is likely to have on UK plc, I suspect the Manchester-based business could be one of few to see an increase in trading over the next few months. Given that the £95m cap remarked that it was already confident of reporting results “at least in line with expectations for the year as a whole” only a couple of weeks ago, that bodes very well for existing investors. 

Aside from the potential for capital gains, the small-cap could also be a good source of dividends. If we assume that the analyst predictions are correct, the firm will return 2.8p per share in this financial year (ending 30 April). That translates to a yield of 3.7%.

Stock in Begbies was changing hands for 13 times earnings before this morning. Although there can be no guarantees, that could turn out to be a very reasonable price to pay once the full extent of the damage wrought by the virus becomes clear.

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 owns shares of Strix Group. 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d take the Warren Buffett approach to building a passive income empire

Christopher Ruane explains how he'd try to earn passive income streams from the stock market by learning from billionaire investor…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

2 of my most amazing buys from the FTSE 100 for passive income

The FTSE 100's home to a number of exceptional shares offering the prospect of handsome income. Here are two to…

Read more »

Investing Articles

1 AI stock to buy and hold for 10 years

AI spending's expected to soar in the next decade, according to most experts. Here's one stock to consider buying to…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Dividend deals! 2 passive income stocks that still look undervalued

Royston Wild explains why these FTSE 250 passive income stocks might STILL be too cheap to miss, despite theirrecent price…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Is BT Group one of the FTSE 100’s greatest value shares?

BT's share price looks like a bargain when you look at the P/E ratio and dividend yield. Is it one…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »