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Why has this small-cap stock been overlooked by dividend investors despite 4.1% yield?

Buying stocks with strong income prospects could be a sound move for 2017. Inflation is already heading towards 2% and is forecast to move up to as much as 3% this year. Therefore, stocks which are able to offer a yield in excess of 3% and strong dividend growth could become more popular among investors. Reporting on Friday was a small-cap stock which may prove to be an excellent dividend stock for 2017.

Upbeat performance

The stock in question is digital media specialist STV (LSE: STVG). It recorded a rise in digital revenues of 20% and a digital margin which has continued to grow above its target level at 52%. Furthermore, its 2016 results showed that its Consumer Division’s margin is at an 11-year high of 18.5% despite a 4% decline in national revenues. This was aided by a resilient core business which has been able to successfully build reach and engagement through the STV Family of consumer services.

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The company’s STV Productions division returned to revenue growth in 2016, with it rising by 53% to £12.7m. It plans to launch an innovative second TV network service in spring 2017, with STV2 expected to increase the reach of the STV Family of consumer services. It will also seek to de-risk the business through the agreement of a long-term Airtime Sales Agreement with ITV (LSE: ITV). This covers the sale of national airtime and sponsorship, which appears to be a positive development for STV.

Dividend potential

The company’s results also included details of the acceleration of its progressive dividend policy, which reflects the board’s confidence in the financial strength of the business. It will aim to pay out between 60% and 80% of cash generation after pension deficit funding. This means that dividends have risen by 50% in 2016, which puts STV on a yield of 4.1%. And since the company is expected to record a rise in its earnings of 4% this year and 11% next year, the prospect of an inflation-beating dividend rise is relatively high.

Sector opportunity

Of course, other stocks in the media sector also have impressive income prospects. For example, ITV currently yields 3.9% from a dividend which is covered 2.1 times by profit. This indicates that there is scope for dividends to rise at a faster pace than profit, while the addition of special dividends also enhances the company’s income attraction.

Certainly, ITV faces a somewhat uncertain future. Advertising revenue in the UK could come under pressure if Brexit causes an economic slowdown. However, the company’s most recent results showed that it has a sound balance sheet, impressive cash flow and a strategy through which to overcome potential difficulties in trading conditions. Therefore, ITV seems to be a strong income stock for the long term, while its smaller sector peer STV may prove to be an increasingly impressive income share to own in the coming years.

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Peter Stephens owns shares of ITV. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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