2 small-cap dividend stocks I’d buy with £1,000 today

Obtaining an income return that beats inflation is now more difficult than it has been for a number of years. The higher rate of inflation plus the bull market experienced in shares means that many stocks could fail to deliver an income return that is positive in real terms.

As such, stocks that are able to do so could experience higher demand from investors over the medium term. This could lead to share price growth for such companies, thereby increasing their total return prospects. With that in mind, here are two smaller companies that could be strong income plays in the long run.

Mixed performance

Reporting on Thursday was private label household and personal care products specialist, McBride (LSE: MCB). The company’s first half performance was somewhat disappointing, with revenue falling by 0.6% at constant currency, while adjusted operating profit was one-third lower versus the same period of the previous year.

The business has experienced margin pressure due to higher inflation. This has caused difficulties in some of its divisions, although it is putting together a new strategy to try and transform its performance. The business continues to operate in line with market expectations, while it remains confident in the growth opportunity that may be ahead in the medium term.

With McBride’s earnings due to rise by 16% in the next financial year, its future appears to be bright. Dividends per share are due to increase by around 17% in the next financial year, which puts it on a forward dividend yield of 3.5%. And with dividends being covered nearly three times by profit, there seems to be scope for further dividend growth over the long run.

Robust growth

Also offering impressive income prospects in the small-cap arena is advertising and PR company M&C Saatchi (LSE: SAA). The company has a solid track record of dividend growth, with shareholder payouts having increased at an annualised rate of 14% during the last five years. And with dividends due to rise by over 6% in each of the next two years, inflation-beating income growth looks set to be ahead for the company’s shareholders.

Of course, M&C Saatchi’s financial performance is closely linked to the outlook for the global economy. On this front, there seems to be a positive outlook, with the prospects for the world economy being generally upbeat. This suggests that further earnings growth could be ahead, with the stock forecast to post a rise in its bottom line of 7% this year and 8% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.7. This indicates that they may offer growth at a reasonable price.

With dividends being covered 2.4 times by profit and it yielding 2.7%, the company’s income outlook seems to be sustainable. As such, and while a potentially cyclical stock, the income potential for investors in the business seems to be high.

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Peter Stephens owns shares in M&C Saatchi. 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.