When people discuss dividend stocks, they tend to think only of big blue chip names. Many investors simply don’t associated small-cap stocks with dividends. But with a great deal of smaller companies punching above their weight on the income front, now may be the right time to consider small-cap dividend stocks for their attractive yields.
Telford Homes
Housebuilders are big dividend payers, with the sector offering an average prospective dividend yield in excess of 7%. Large-caps in the sector tend to offer more income, but many of the smaller rivals have stronger dividend cover and better growth prospects.
One small-cap housebuilder which particularly stands out to me is Telford Homes (LSE: TEF). Amid a slowing housing market, the London-focused residential property developer is bucking the trend.
The company’s financial performance is going from strength to strength. Last year, Telford’s pre-tax profits increased 35% to £46m, well in excess of original market expectations. Meanwhile, revenues increased to a record high of £316.2m, while the company reported a strong improvement in adjusted operating margin of 3.3 percentage points, up to 16.7%.
Growth
Looking ahead, management reckons Telford is well placed to deliver pre-tax profits exceeding £50m for the year to 31 March 2019, representing a 100% increase over four years. With such confidence, Telford raised its dividends for the full year to 17p a share, giving its shares a current yield of 4.1%.
Although the current yield pales in comparison to its sector peers, there’s considerably more potential for dividend growth with the company. Not only is its payout ratio significantly smaller than its rivals — at just over a third of its earnings, but future earnings are currently forecast to climb faster.
Build to rent
Moreover, Telford’s meaningful and growing exposure to the nascent build-to-rent market means its earnings ability should be less volatile than that of its sector peers. On build-to-rent contracts, the company benefits from forward funding, which reduces the amount of its own equity used during construction, enabling it to earn a much higher return on capital.
Although this comes at the cost of lower gross margins, due to savings in selling expenses and interest costs, greater exposure to the build-to-rent market should help it to weather the slowing housing market better than many of its rivals.
Shoe Zone
Elsewhere, I reckon Shoe Zone (LSE: SHOE) is another small-cap dividend stock to consider. At its current share price, the discount retailer offers income investors a prospective dividend yield of 6.2%.
Consumers may be abandoning the high street in favour of online shopping, but one area which is proving more resilient than most is the discount segment of the retail market. Keeping that in mind, shares in Shoe Zone, the UK’s leading value footwear retailer, have outperformed many of its sector peers with a gain 11% over the past 12 months, against the general retailer sector’s 8% dip.
Sure, the footwear retailer isn’t immune to structural issues affecting the sector — revenues have slipped for three consecutive years. But things appear to be stabilising, with revenues in the six months to 31 March growing by 1.1% to £73.7m. On the cost front, rents on renewals fell on average by 22%, giving it a full year saving of £100,000. And what’s more, with the balance sheet in a net cash position, Shoe Zone has the financial flexibility to maintain payouts for quite some time.
