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Searching for income? I’d take a look at these small-cap dividend stunners

Whether you put what you receive back into the market or spend it (my suggestion is the former, particularly for younger Fools), buying shares in dividend-paying companies is a popular investing strategy.

Unfortunately, a lot of us stick to stocks in the FTSE 100 or FTSE 250. That’s a bit of a shame, particularly as there are actually quite a few quality minnows returning decent amounts of cash to their shareholders right now. Here are two examples that I think are worthy of further research. 

Still cheap

Laser-guided product manufacturer Somero Enterprises (LSE: SOM) impressed the market last week with an encouraging update on trading.

The company reported strong growth in the second half of 2018 and, as such, expects full-year revenue to be “moderately ahead” of the $90m previously expected by the market. Positively, this will also be higher than the five-year target set by management in 2014.  

To make things even better, earnings and net cash are also likely to be “moderately” and “more significantly” ahead of market predictions, respectively. 

Somero reported growth in three of its six regions with operations in North America leading the charge. Efforts to crack China are “yet to gain full traction” but it continues to see “meaningful growth opportunities” in this and other territories. Decent progress has also been made on its push to innovate new products with one launch, the SkyScreed 25, scheduled for later this month.  

As a result of all this, Somero confirmed that it has no plans to change its dividend policy. It still intends to pay out 50% of adjusted net income for the full year, and a special dividend equating to 50% of excess net cash over the target of $15m. 

Having done so well over 2018, investors were no doubt also pleased to learn that management was bullish on the £190m-cap’s prospects over 2019, particularly in North America where it currently has a “strong pipeline of construction projects.” 

Despite a storming double-digit percentage rise to the share price on the day, Somero still looks cheap to buy, on a little more than 10 times earnings, in the new financial year.

Taking into account the seriously-high operating margins and returns on capital it has achieved over the years, not to mention the 6.2% yield, and I’m sorely tempted to take a position.  

Reliable dividends

£400m-cap critical power converter supplier XP Power (LSE: XPP) is another small stunner that I think should attract value and income investors.

Like Somero, the stock currently looks very reasonably priced, changing hands for just 11 times earnings, and has a great track record when it comes to generating returns on the money it invests. And then there’s the dividends.

Having fallen out of favour in the second half of 2018 due to macroeconomic fears and a (temporary) shortage of components it requires to build power converters, XP now yields 4.4%, based on an expected return of 87.8p per share in the current financial year. You could get a lot more from some firms in the FTSE 100, but XP’s payouts — likely to covered twice by profits — look far more secure.

I also think there’s plenty of scope for higher cash returns in the future, given that the company has hiked its dividend in nine of the last 10 years, and its payout ratio is still below 30%. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. and XP Power. 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.