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2 dividend-paying small-caps with monster growth potential

London-focused residential property developer Telford Homes (LSE: TEF) has been climbing strongly lately, with its share price up 17% in the past three months. Over five years, it’s up 70%, in line with bigger names in the sector such as Barratt and Bovis Homes.

Construction time again

This morning the £345m AIM-listed builder published its final results for the year to 31 March and has dipped slightly despite a positive set of numbers. It posted record total revenue of £316.2m, up 8.3%, with total profit before tax exceeding original market expectations, increasing 35% to £46m. Margins rose also and the group said it is “well placed to exceed £50m of total pre-tax profit for the year to 31 March 2019, representing a 100% increase over four years”.

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Telford has been helped by the “robust” London market, with recent price weakness mostly at the prime end, whereas its development pipeline prices average £539,000, a figure it expects to remain relatively constant in future. 

The days of double-digit house price growth may not return for some years, in my view, despite Bank of England timidity on hiking rates. This may cap share price growth although the forward pipeline looks healthy, despite London planning constraints and skills shortages.

Home front

Today, the board announced a proposed final dividend of 9p per share bringing its total dividend for the year to 17p, up 8% on 2017’s total 15.7p. Telford expects to pay at least one third of annual earnings in dividends and currently offers a forward yield of 4.1%, nicely covered 2.9 times. Earnings per share (EPS) are forecast to rise 15% in the current financial year, then another 5% the year after.

As my Foolish colleague Royston Wild has pointed out, Telford is cheap right now. It trades at a forecast 8.4 times earnings, which looks tempting given its progressive dividend policy.

X men

You might also want to consider another small-cap with outsize dividend prospects, digital marketing services group XLMedia (LSE: XLM), which my colleague Rupert Hargreaves recently said offered a strong long-term growth story. Over three years, the stock is up a healthy 170%, although it has retreated in recent weeks, falling 10% as growth forecasts slip.

XLMedia uses skills to generate high-value web traffic for customers, in return for a share in revenues or fixed fees. It specialises in the $32bn online gaming sector, running more than 2,000 content-rich websites designed to attract online gamers and direct them to around 150 partners across more than 20 countries. In April it edged into a more traditional form of gaming, buying bingo comparison site WhichBingo.co.uk for an undisclosed sum.

Bingo!

The group boasts strong operating margins of 29.6%, with little debt, and a stonking 109.3% return on capital employed. City analysts are expecting a dip in its growth profile this year, with EPS falling 1% as earnings drop 12%, although both are expected to recover strongly in 2019.

That’s a little disappointing, given that XLMedia currently trades at a forecast 16 times earnings. However, this £358m AIM-listed stock offers a healthy forecast yield of 3.5%, covered 1.9 times, and its long-term prospects remain promising… if you like a gamble.

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harveyj has no position in any of the 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.