UK shares are popular among dividend investors. The FTSE 100 in particular is packed with mature, cash-generating companies that distribute delicious dividends to their shareholders. But stocks listed on the Alternative Investment Market (AIM) can also be a great place for income.
Asset manager Octopus Investments notes that “while many of the better known ‘traditional’ equity income stocks focus on the FTSE 100, there are over 550 dividend-paying companies across the entire UK equity market.” So it can pay to look outside London’s premier stock index.
Here are two great reasons why searching AIM shares for dividends can be an excellent idea.
#1: Rapid dividend growth
Admittedly the average dividend yield across these smaller companies isn’t spectacular. In fact, for 2023 the AIM average sits at 1.7%, according to Octopus. This is far below the 3.9% that FTSE index shares currently offer.
But long-term investors need to pay attention to the pace at which dividends are tipped to grow too. A rising dividend can help individuals mitigate the impact of increasing inflation on their wealth.
This is where AIM companies are especially impressive. Octopus notes that dividend payments from these UK stocks have grown by an “impressive” 64% since 2015. Back then total payouts came in at £770m.
By comparison, dividends from FTSE 100 shares rose a more modest 17.3% over the same period.
Dividends from AIM shares are expected to rise to around £1.3bn this year. And interestingly, Octopus says that AIM is the only UK index where cash payouts are on course to return to pre-pandemic levels in 2023.
#2: Superior dividend cover
Buying income stocks involves more than looking at yields and predicted dividend growth, though. Payout projections often aren’t worth much if estimated rewards are poorly covered by earnings. And especially if a company’s balance sheet is looking stretched.
Dividend cover of two times and above usually suggests that a business has ample profit to dole out the dividend City analysts expect. Conversely, readings below 1.5 times suggest a payment cut or postponement could be on the cards.
Why am I explaining this? Well encouragingly, average dividend cover for AIM shares sits at a robust 3.5 times, according to Octopus estimates. This level can provide even the most risk-averse investor with supreme peace of mind.
On top of this, coverage here also beats that of both the FTSE 100 and FTSE 250. The readings here both come in at 2.4 times.
The verdict
Clearly AIM shares are worth checking out for investors seeking solid dividends now and in the future. But it’s important to remember that smaller companies can often be more vulnerable during downturns than larger, established companies on the London Stock Exchange.
Having said that, with some solid research investors can separate robust companies from the duds and make terrific long-term wealth. There’s plenty of information out there to help people make the right calls too.
