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Two small-cap stocks with 5% dividends I’d buy today

Dividends are normally associated with large, blue-chip companies that dominate the FTSE 100 index. However, it’s possible to find smaller companies that pay dividends, and some of the payouts in this area of the market can even be quite generous. With that in mind, here’s a look at two under-the-radar smaller companies that currently have dividend yields in excess of 5%.

Chesnara

Life insurance and pension provider Chesnara (LSE: CSN) specialises in buying portfolios of insurance policies from other insurance firms and managing them until they’ve expired. The £580m market cap firm currently administers over a million life and pension policies and manages over £7.5bn in funds.

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Chesnara takes great pride in rewarding shareholders with sizeable dividend payouts, and the dividend growth generated by the company over the last 10 years has been impressive. Indeed, over the last decade, Chesnara has increased its dividend from 13.1p to 19.5p, a compound annual growth rate (CAGR) of an inflation-beating 4.1%.

City analysts forecast a payout of 19.8p for this year, meaning that the forward-looking yield is now a formidable 5.1%, higher than the yields of many FTSE 100 companies. Furthermore, dividend coverage for this year is estimated to be around 1.5 times, suggesting that there’s little chance of the dividend being cut.

Chesnara’s share price has climbed from around 320p a year ago to 390p today, a gain of 22%. However, with earnings of 30.5p forecast for FY2017, the stock’s valuation still looks attractive at a forward-looking P/E ratio of 12.8.

SafeCharge International 

Turning my attention to a company with an even smaller market capitalisation, £410m market cap SafeCharge International (LSE: SCH) also sports a sizeable dividend yield at present.

The UK-based small-cap company is engaged in the provision of online and mobile payments services, and has a diversified client base which includes William Hill, Paddy Power Betfair and McDonald’s. Online and mobile payments is a fast-growing area right now, and the company has enjoyed a strong rise in profitability over the last few years.

Indeed, between FY2014 and FY2016, revenue climbed from $77m to $104m and net profit surged from $14.4m to $26.6m. This impressive growth has enabled the company to reward its shareholders with increasing dividend payouts, and over the last three years, shareholders have received payments of 8.3 cents, 11.3 cents and 16.5 cents. City analysts envisage a dividend hike of a further 13% this year, which would take the payout to around 19 cents, a yield of an impressive 5.2%.

It’s worth noting that dividend coverage isn’t particularly strong, at a level of 1.1 last year. And there are other risks involved in the investment case, including the fact that the online gambling industry, a sector that the company has significant exposure to, is prone to interference from regulators.

However, in late July, management stated that “the Board remains confident that the outcome for the year will be broadly in line with market expectations” and on a forward-looking P/E ratio of 16.7, the valuation here looks very reasonable.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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