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2 small-cap dividend-growth stocks I’d buy with £2,000 today

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With inflation remaining at a relatively high level, dividend growth stocks could become more in demand among investors. After all, obtaining an inflation-beating yield may become more challenging, and companies that are able to raise shareholder payouts at a fast pace could be rewarded via a higher share price.

Of course, there are a number of large-cap stocks that offer upbeat income growth prospects. However, some smaller companies could also be of interest to income-seeking investors. Here are two prime examples.

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Solid growth

Reporting on Wednesday was manufacturer of photonic components and systems Gooch & Housego (LSE: GHH). The company has been performing in line with management expectations and has benefitted from positive overall market conditions in the first four months of the financial year.

There has been exceptional demand for critical components used in microelectronic manufacturing. And while there has been a slowing in demand for high reliability couplers since the start of the year, this is expected to come back in the second half of the year.

With an order book that has reached record levels, the outlook for the stock remains positive. In fact, it is forecast to post a rise in earnings of 11% in the current year. This follows a strong trend of growth in previous years, with the company generating an annualised bottom-line growth rate of 12% during the last five years.

In terms of its dividend prospects, Gooch & Housego’s coverage ratio of 4.9 suggests that it could afford to pay out a significantly higher proportion of profit as a dividend. This could help to lift its yield of 0.8% to substantially higher levels. And with the company having a reliable track record of growth, its shares could continue to rise following their 23% growth in the last year.

Uncertain prospects

One smaller company which has endured a difficult recent period is beverages company Nichols (LSE: NICL). The producer of Vimto has experienced supply issues in the Middle East that have caused its operational and financial performance to come under pressure versus expectations. As such, the stock is forecast to post a rather lowly 4% rise in earnings in each of the next two financial years. This is considerably lower than the double-digit growth which has been delivered in recent years.

With the Nichols share price having fallen 6% in the last three months, there could be a wider margin of safety on offer than is normally the case. The business continues to have a bright long-term future, although its near-term performance could be relatively volatile.

With its dividend being covered 2.1 times by profit, the company appears to have significant scope to raise payouts to its shareholders over the long run. While it may only yield 2.2% at the present time and lacks the stability of previous years, the total returns on offer may be exceptionally high.

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Peter Stephens owns shares in Nichols. The Motley Fool UK has recommended Gooch & Housego and Nichols. 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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