This super small-cap could be a better dividend buy than National Grid plc

Shares of utility giant National Grid (LSE: NG) have fallen by 17% since May. They’re now cheaper than at any time since mid-2015.

However, if you pull back and take a longer view, you’ll see that this is still one of the best performing big UK utility stocks. The shares are still worth 30% more than they were five years ago. By contrast, SSE has only gained 5%. Centrica has fallen by 40%.

I think that the Grid’s recent decline is no bad thing. At May’s high of 1,157p, the forecast dividend yield had fallen to 4%. That seemed too low to me, given that the payout is only expected to rise in line with inflation.

At today’s price of 950p, National Grid now offers a forecast yield of almost 5%. I’d argue that’s about right. I’d be happy to buy the shares for income at current levels. But I also think it’s worth considering some of the limitations of this business.

The first is that this is already very large and mature. Although pricing power and profits are likely to keep pace with inflation, I don’t expect much more than this. Revenue has risen by an average of just 1.7% per year since 2012. Operating profit from continuing operations has fallen by an average of 1.9% each year over the same period.

Overall, I think National Grid is a great dividend stock, but I think that its growth potential is limited. If you’re looking for a great dividend stock with good growth potential, I have another suggestion.

Heading for new highs?

Carr’s Group (LSE: CARR) has a history stretching back to 1831. Today, it’s a group of agricultural feed businesses and engineering companies.

Carr’s share price got hammered in March, when the firm was forced to issue a profit warning. The shares have recovered somewhat since then but are still cheaper than they were at the start of the year. However, recent news from the firm could strengthen the upwards trend.

In July, an update confirmed that trading conditions were improving in the agricultural sector. The group’s engineering business has suffered as a result of the oil and gas downturn, but trading is healthy elsewhere and the division is expected to hit profit forecasts this year.

Carr’s is also working hard to diversify. The group announced a $20m acquisition of US firm NuVision Engineering today. This specialist business operates in the nuclear power sector. It gives Carr’s an entrance into the US nuclear market and expands the capabilities of its existing nuclear business.

This isn’t a big acquisition — NuVision generated revenue of $8.8m last year, compared to £315m for Carr’s. But I often prefer small, targeted acquisitions to larger deals. With good management, they can be a successful way to deliver market-beating growth.

The stock currently trades on a forecast P/E of 17, falling to a P/E of 13.5 for 2018 as profits rebound. The dividend yield of 2.8% may not seem very high, but the payout has not been cut since 2001, and should be covered twice by earnings. In my view, now could be a good time to buy.

This dividend stock could be worth 56% more

If you're looking for reliable small-cap income stocks with growth potential, then I'd urge you to consider this home-grown UK business.

Our analysts have chosen this stock as their 1 Top Small-Cap Stock From The Motley Fool. They believe the fair value of the shares could be 56% higher than the current share price.

This stock does look cheap to me. If you'd like full details of the potential buy, then download our free, no-obligation report today. To get your copy, just click here now.

Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. 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.