The Motley Fool

2 ‘secret’ small-cap dividend stocks I’d buy for 2018

Today I’m looking at two high-yielding small-cap dividend stocks. Both companies are being unfairly overlooked by the market in my opinion and could be good picks for 2018.

A stealthy 6% yield

AIM-listed Shoe Zone (LSE: SHOE) is a budget retailer focused on the cheap end of the shoe market.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Shares in this Leicester-based firm edged higher on Thursday, after it said sales had fallen by 1.2% to £157.8m last year due to the closure of lossmaking stores.

And although pre-tax profit fell by 7.3% to £9.5m as a result of exchange rate losses, the market seemed reassured by net cash of £11.8m and an unchanged final dividend of 6.8p. This leaves the payout for the full year at 10.2p, giving a yield of 6.3%.

Why I like this business

One of the reasons I like Shoe Zone is that its chairman and chief operating officer, Anthony and Charles Smith, own 50.01% of the shares. Although this gives them control of the company, it should also mean that their interests are aligned with those of other shareholders.

A second attraction is that almost 85% of footwear is ordered directly from overseas factories, cutting out the middleman. This boosts the firm’s margins and gives it greater control over quality and design.

Short leases mean that the group’s store portfolio is flexible and benefits from falling rental rates on lease renewals.

A final attraction is that this business has consistently generated a return on capital employed (ROCE) of more than 22% since its flotation. That’s high by any standards, and is one of the main reasons why cash generation (and dividends) are so strong.

Of course, this stock isn’t without risk. Growth rates have been very low since flotation and currency headwinds are expected to remain a problem. But these risks are already reflected in the share price, in my view.

With the shares now trading on 10 times forecast earnings and offering a 6.3% yield, I’m seriously considering buying a few for my own portfolio.

Earnings could rise by 21%

Shoe Zone’s low rating may be a result of weak growth. But no such excuse applies to technology recruitment and outsourcing group Harvey Nash Group (LSE: HVN). Analysts expect earnings at the firm to rise by an impressive 21% in 2017/18, and by a further 22% in 2018/19.

Why then does the stock trade on a 2018 forecast P/E of 8.1? One reason may be that the market is not convinced that the group’s profits will be sustainable. That’s a valid concern, given hiring headwinds in the UK, which with Ireland accounts for nearly 40% of fee income.

A second risk is that the firm’s first-half earnings were a little mixed. Although revenue rose by 9.2% to £425m, excluding exchange rate effects, underlying pre-tax profit was only 1.8% higher, at £4m. Net debt has also risen due to acquisitions.

I’m optimistic

Analysts covering the stock have upgraded their profit guidance three times over the last year. I’m prepared to trust management guidance that performance will be stronger during the second half of the year.

With the stock trading on a P/E of 8 with a prospective yield of 5%, I believe Harvey Nash could still be a rewarding buy.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Harvey Nash Group. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.