The idea of earning passive income from AIM stocks might seem a little odd. After all, a substantial portion of the junior market is made up of growth-focused companies. What’s more, small-caps tend not to be the sort of shares that allow one to sit back, relax and collect cash. After a bit of digging, however, I’ve found three I’d buy.
Operating on six continents, Guernsey-based Ienergizer (LSE: IBPO) provides outsourcing services to companies in fields including banking, healthcare and gaming. This diversification should make earnings — and therefore dividends — pretty secure. Analysts have the stock returning 15p in the current financial year. That gives a juicy yield of 5%.
Other things I like about IBPO include the high returns on capital and reasonable valuation (17 times earnings). The fact that founder Annil Aggarwal holds a massive amount of shares should also ensure that his interests are aligned with those of retail investors like me.
As with many AIM stocks however, IBPO could prove to be a volatile holding. The ‘free float’ — the amount of stock available to trade on the market — is very small at just 17%. This could mean it takes only a few buys or sells to make the share price motor or sink respectively.
Urban Logistics REIT
The company has 76 assets on its books and an occupancy rate of 93%. Tenants include DHL, Amazon and Hermes. Margins for this kind of work tend to be very good indeed.
Another attraction is the valuation. SHED may be a lot smaller than peers such as Tritax Big Box, but it’s also cheaper to buy. The stock currently trades at 21 times earnings. A 4.9% yield is also far more than I’d get from the FTSE 250 constituent.
I can’t see too many downsides to me adding SHED to my portfolio. That said, a slowdown in the UK economic recovery for whatever reason could still impact sentiment.
Then again, a move away to the main market is looking increasingly likely. This increase in the liquidity of its stock should attract the attention of more investors and help push the shares higher.
A final AIM stock I’d buy would be FRP Advisory (LSE: FRP). The company specialises in corporate finance, debt and restructuring. In its own words, FRP gets “under the skin of businesses in complex and difficult situations”. Thanks to Covid-19, I don’t think there’ll be a shortage of clients once government support fizzles out.
Trading is already going well. Back in July, FRP reported a 25% jump in revenue to £79m in its last full year. As one would hope, the firm’s balance sheet also looks robust with a net cash position.
That said, it’s worth mentioning that the dividends are the lowest of the three mentioned. A 4.37p per share distribution equates to a 3.7% yield. That’s only slightly more than I’d get from buying a FTSE 100 tracker.
So, while I like the defensive nature of this business, I’d need to question whether it’s worth the hassle if truly passive income were my primary objective. It helps that FRP is the cheapest AIM stock mentioned here (16 times earnings).
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tritax Big Box REIT and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.