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Two 5% dividend stocks you may not have spotted

The FTSE 100 is home to many world-class dividend stocks. However, what many investors don’t realise is that there are plenty of smaller companies listed in the UK that also pay big dividends. With that in mind, today I’m profiling two under-the-radar small caps that are paying shareholders bucket loads of cash at present.

Safecharge

£450m market cap SafeCharge International Group (LSE: SCH) is a UK-based payment services provider. The company provides these services to a blue-chip client base all around the world, with its proprietary payment platform connecting directly to all major card schemes including Visa, MasterCard and American Express.

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Reporting full-year numbers for 2017 this morning, the company revealed that it processed 174m transactions last year, a 38% increase on 2016. This pushed revenues up a healthy 7% to $111.7m, although diluted earnings per share fell 9% to 15.8 cents on the back of larger employee-related and restructuring costs.

Turning to the dividend, SafeCharge operates a policy whereby it pays out 75% of adjusted EBITDA, as long as there is no material M&A activity. As a result, the company has this morning announced a full-year payout of 16.9 cents per share, a yield of 4% at the current share price. That now marks three consecutive dividend increases since the firm paid its first distribution in 2014. In this time, the payout has grown over 100%. Can investors expect more dividend growth going forward?

As it stands, City analysts currently forecast a payout of 21 cents per share for 2018. At today’s share price, that equates to a yield of 5%. However, analysts’ forecasts can be a little inaccurate sometimes, so I’d approach that estimate with an element of caution. For example, today’s 16.9 cent dividend is around 11% below what analysts had pencilled in for 2017.

Nonetheless, with CEO David Avgi commenting this morning that “we remain confident that our focus on higher quality revenues driven by a healthy sales pipeline will yield profitable revenue growth in 2018 and beyond,” the outlook here does look positive, in my view.

Polar Capital Holdings

Also paying out sizeable dividend cheques to shareholders is investment manager Polar Capital Holdings (LSE: POLR). The company runs a range of specialist funds including the popular Polar Capital Technology Trust, and currently has assets under management of around £12bn.

For the last four years, it has paid shareholders 25p per share in dividends each time. At today’s share price, that equates to a yield of a high 5%. Does that make it a ‘buy’ for its yield?

One thing that’s worth noting about the dividend here is that for the last two years, it hasn’t been covered by earnings. For 2016 and 2017, adjusted earnings per share were 22p and 20.4p respectively, meaning that dividend coverage was below one. That’s clearly not ideal from an income investing perspective, as it suggests the payout is not sustainable.

Having said that, for the year ending 31 March 2018, analysts do expect a significant jump in EPS, to 35.6p, as well as a hike in the dividend, to 26.4p per share. With that in mind, it could be worth waiting for full-year results before buying the shares for the dividend, in order to get a better idea of payout sustainability.

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Edward Sheldon 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.

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