Everyone’s talking about blue-chip shares when it comes to building a second income. But smaller companies can often deliver even more attractive yields – if an investor’s willing to accept some added risk.
Small-caps don’t always come with the stability of the big names, but they can offer fatter payouts and the chance to uncover hidden gems. Of course, liquidity’s lower, so selling a position at the desired price isn’t always straightforward. That said, every so often, I spot smaller UK shares that combine generous dividends with reasonably strong financials.
Here are two I think income-focused investors should weigh up. Both strike me as overlooked dividend plays that could sit neatly in a diversified income portfolio.
Central Asia Metals
Central Asia Metals (LSE: CAML) is a copper producer with operations in Kazakhstan and North Macedonia. It’s not the kind of stock that usually dominates headlines, but the dividend yield is an eye-popping 12.7%. For investors chasing a second income, that’s going to grab attention. The £247m company has also built a strong track record, paying dividends for 13 consecutive years.
Financially, it looks decent too. The dividend payout ratio stands at 83.8%, which is high but still within reason for a miner. On profitability, the net margin sits at 17%, and the balance sheet is almost debt-free – a rare strength in the sector. With a price-to-earnings (P/E) ratio of just 9.57, it even looks undervalued compared with peers.
But some risks can’t be ignored. Mining in emerging regions brings political and currency-related uncertainties. Any disruption in Kazakhstan or North Macedonia could directly hit production. The share price has also slipped 6.7% over the past five years, and investor confidence recently took a knock when Berenberg trimmed its price target from 180p to 170p.
Despite those challenges, I think Central Asia Metals is still worth considering for income hunters. The yield is hard to overlook, and the clean balance sheet gives it room to manage bumps along the road.
City of London Investment Group
City of London Investment Group (LSE: CLIG) shouldn’t be confused with the better-known City of London Investment Trust. This is the holding company behind the business, focused on running asset management operations.
It has a slightly lower yet still-healthy dividend yield of 8.52%, with an 11-year track record of continuous payments. Balance sheet strength looks reassuring, with low debt and an operating cash flow of £18.42m. Margins are also robust, which supports the sustainability of those payouts.
On the flip side, the dividend payout ratio sits at 113.4%, which is stretched. That’s the sort of number that makes me pause because it suggests future payouts could come under pressure if profits dip. The price-to-book (P/B) ratio of 1.58 also hints that the shares may be slightly overvalued compared with other asset managers. And unlike some small-caps, the growth potential looks limited, with the share price not expected to climb much.
Even so, with a yield comfortably above the FTSE 100 average and a solid financial footing, I think the £187m company’s another one worth checking out for anyone building a second income portfolio.
