When it comes to building long-term wealth on the stock market, few can argue with the simple tried and tested strategy of dividend investing. Buying and holding solid blue-chip companies that pay steady and reliable dividends twice (or sometimes even four times) a year is not to be sniffed at.
Go one step further
But savvy income-focused investors go one step further. They seek out companies whose shareholder payouts rise year-on-year, and reinvest those proceeds to unleash the full power of compounding – what’s known as the snowball effect.
It’s true that the vast majority of dividend hunters are primarily focused on the perceived safety of the large multi-nationals listed on London’s top tier FTSE 100 index, but I reckon these investors could be missing out on possible bargains among the companies lower down the pecking order of market capitalisation.
While some of the more popular large-cap income stocks can sometimes command a premium valuation, their smaller counterparts are often found to be trading at far more attractive prices. I believe Headlam Group (LSE: HEAD) falls into this category quite nicely. Despite being Europe’s largest distributor of floor coverings, with a market capitalisation of £490m, the Birmingham-based group isn’t large enough to be included in the FTSE 100 or mid-cap FTSE 250 indices, but I believe it could be just a matter of time.
At the end of 2017 the group announced the acquisition of Domus, the UK’s leading specification consultant and supplier of hard surfaces for premium construction and refurbishment projects, in a deal potentially worth more than £35m. I believe the acquisition will help diversify and broaden Headlam’s overall position in the floor coverings market as it gives it an entry into ceramics and an increased weighting in engineered wood, LVT and laminate, incorporating product lines that continue to achieve ongoing growth in the market.
The acquisition should also significantly increase the group’s presence in the commercial specification market and bring in considerable expertise, providing a platform to pursue further domestic and international growth opportunities. With this in mind I think Headlam’s shares are a steal at just 13 times forward earnings, with a rising dividend that currently yields no less than 4.7%.
Another high-yielding small-cap that looks attractively priced at the moment is Wincanton (LSE: WIN). The Wiltshire-based logistics firm is the UK and Ireland’s leading provider of supply chain solutions, operating from over 200 locations right across the British Isles.
The group’s share price breached 300p last summer, reflecting stellar growth over the last few years, but a sharp pull-back in recent months seems to have presented a buying opportunity for income-focused investors with one eye on capital growth.
Since being reinstated back in 2016, Wincanton’s dividend payouts have risen sharply, with analysts forecasting further increases this year and next, leaving the shares offering a solid yield of 4.6%. Furthermore, a bargain basement valuation of just seven times earnings for the current year to the end of March makes the shares even more irresistible.
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Bilaal Mohamed has no position in any shares 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.