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2 small-cap dividend stocks you shouldn’t ignore

Shares in Games Workshop (LSE: GAW) have jumped by nearly 10% in early deals this morning after the company issued yet another bullish trading update. 

This morning the firm, which has seen its share price rise 155% excluding dividends year-to-date, announced that “trading for the first quarter of the current financial year has continued strongly,” and “given the high operational gearing of the business, profits for 2017/18 to date are therefore well above the same period in the prior year.” The company also announced a 35p per share dividend, following a full-year payout of 74p in July, which was up 85% year-on-year. 

Plenty of income 

Games Workshop is a cash cow. The group’s high margin products and operational gearing means return on capital is high as the company does not need a large asset base from which to sell its figures. City analysts were forecasting a full-year dividend payout for the group of 90p per share, but based on today’s announcement, and last year’s total payout of 74p, it looks as if this figure is now out of date.

If we include today’s dividend and assume a payout of 74p per share is declared again at the end of the year, investors will receive a total of 109p per share for a yield of 6%. As the company is highly profitable and debt free, it looks as if it can maintain the high level of distributions. Unfortunately, the shares aren’t cheap, trading at a forward P/E of 16.5, but I believe it’s worth paying a premium to buy into Games Workshop’s success story. 

Cheap income? 

As Games Workshop has charged ahead, Lookers (LSE: LOOK) has struggled to win favour with investors. Year-to-date shares in the motor retailer have declined by 7%, but after these declines, the firm looks attractive for income-seeking bargain-hunters. 

Shares in Lookers have dropped on investor concerns that the company will suffer from the UK’s decision to leave the EU and the economic turmoil it may bring. When times are hard, consumers give up big ticket items such as cars first, which puts Lookers right in the firing line. 

That being said, there’s already plenty of bad news baked into the shares as they currently trade at a forward P/E of 7.3. Such a low valuation implies that investors expect the company’s earnings to fall dramatically over the next few years. City analysts are not expecting a severe decline with current projections suggesting flat earnings over the next two years. The most recent results from Lookers, for the six month period to 30 June, showed earnings per share growth of 15% and if this performance continues, there could be a re-rating of the shares to a higher valuation multiple. 

What’s more, the shares also support a dividend yield of 3.4%, and the payout of 3.8p per share is covered around four times by earnings per share, leaving plenty of room for dividend growth and headroom if earnings slide. 

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Rupert Hargreaves owns no stock mentioned. 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.