Investors seeking high dividend yields tend to favour blue-chip stocks like Legal & General, Aviva, and HSBC. And that’s understandable, as these kinds of companies are established and often very reliable dividend payers.
But there are plenty of small UK companies – outside the Footsie – that sport high yields and have equal, if not more, return potential. Here’s a look at one that I feel could be worth considering right now.
A high yield from a UK small-cap
The stock I want to highlight today is Record (LSE: REC). It’s a small British financial services company that specialises in currency hedging and specialised asset management and currently comes with a market-cap of around £120m.
Listed on the London Stock Exchange‘s main market (not the AIM), it trades for 62p. At that share price, its prospective dividend yield is about 7.6%.
A diversified business model
Now, this kind of small-cap stock’s going to be riskier than a blue-chip like Legal & General. However, looking at the company and its financials, I like the risk/reward proposition.
Recently, Record introduced three key product pillars. These are risk management, absolute return, and private markets.
I think this is a sound strategy. Not only does it diversify the company away from currency management (its original business activity), but it provides potential for more long-term growth.
The private markets exposure looks particularly interesting. It’s still early days here (meaning that this segment isn’t having a big impact on revenues today) but this is a huge growth market and there’s substantial potential.
The currency management side of the business still has the potential to do well though. With Donald Trump in the White House, the world’s currency markets are likely to be volatile in the years ahead.
Attractive financials
Zooming in on the financials, I like what I see. This is a very profitable company. Last year, return on capital employed (ROCE) was a high 30%, meaning that the firm’s good at generating profit from the money it has invested in the business.
Meanwhile, dividends are rising, which is what I want to see from an income stock. Over the last three financial years, the annual payout’s jumped from 3.6p per share to 4.65p per share (4.68p per share’s expected for the current financial year).
As for the valuation, it looks attractive. Currently, the price-to-earnings (P/E) ratio’s only 12.6. At that multiple, there’s scope for an upward re-rating if the company can show its new triple-pronged strategy’s working.
Worth a look
On the downside, dividend coverage (the ratio of earnings to dividends) isn’t high. So there are no guarantees that the company will be able to continue paying big dividends.
There are also no guarantees that the company’s new strategy will pay off. After all, private markets is a competitive industry and the group’s up against some big players.
However, I see a lot of reasons to consider this small-cap stock. Not only does it have the potential to be an income machine but there’s also scope for share price gains.
