When it comes to buying high-yield dividend stocks, investors often restrict their search to well-known FTSE 100 companies. That’s not a bad strategy, in my view, but I think it misses out on some excellent income opportunities among smaller firms.
Today I’m looking at three UK small-cap shares with forecast dividend yields over 8%. I think they’re all attractive investments with solid future prospects.
Buy the dip
My first choice is property developer Watkin Jones (LSE: WJG). This £270m business specialises in building purpose-built student property and build-to-rent apartments.
Unlike a typical housebuilder, this business doesn’t generally hold unsold property on its books. Instead, new projects are generally forward sold to buyers before they’re completed. This model reduces the financing risk taken by Watkin Jones and supports attractive profit margins.
Management say that the firm started its new financial year (on 1 October) with £270m of revenue already secured. That’s around six- or seven-months’ trading.
However, the firm’s profit margins are coming under pressure due to higher interest rates. What’s happened is that Watkin Jones’ buyers are facing higher borrowing costs. As a result, they’re pushing for slightly lower purchase prices.
Property market conditions could still get worse. But Watkin Jones’ share price has fallen by 50% since August and the firm has plenty of cash. The dividend looks safe to me, providing a forecast yield of 8.5% for 2022/23.
A household name
My next stock is more of a household name. Tile retailer Topps Tiles (LSE: TPT) recently reported record sales for the second year running. Adjusted pre-tax profit for the year ended 1 October climbed 4% to £15.6m, despite rising costs.
Topps’ share of the UK tile market rose to 19% last year. Average sales at each store are 25% higher than they were in 2019. Nearly two-thirds of sales are now made to trade customers.
This business looks in good shape to me. The main risk I can see is that in a prolonged recession, demand for home improvement would be likely to fall. That would probably hit sales.
Fortunately, there’s no sign of this yet. The company says that like-for-like sales rose by 3.4% between 2 October and 28 November, compared to the same period last year. City analysts expect a dividend of 3.6p per share for the year ending October 2023, giving Topps Tiles a forecast yield of 8.9%.
A niche investor
City of London Investment Group (LSE: CLIG) is a specialist asset manager that serves wealthy individuals in the US and institutional clients in the UK.
CLIG specialises in investment trusts and fixed income (bonds), with a focus on value strategies.
This business is highly profitable and consistently generates plenty of surplus cash each year. The main risk for investors is that it’s been very slow growing. CLIG’s share price of 418p at the time of writing is roughly the same as it was five years ago.
Despite this, shareholders have done well, thanks to generous and reliable dividends. I calculate that dividends received over the last five years would have provided a return of nearly 40% — all in cash.
At current levels, City of London shares offer a forecast yield of 8.3% for 2022/23. I think that looks safe and rate these shares as a good buy for income.
