Why I think these small-cap dividend stocks could set you on your way to making a million

Building a portfolio worth seven figures will take time, but this Fool believes these market minnows can help you get there.

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Building a million-pound portfolio may sound fanciful but it’s actually very achievable for many private investors. Simply re-invest any dividends back into the market and allow the magic of compounding to work over two or three decades.

It’s the mirror opposite of a get-rich-quick strategy and that’s partly why it works so well for those patient enough to adopt it. 

But don’t make the mistake of thinking that you need to stick to buying only the biggest UK-listed companies to reach seven figures. Here are two income-generating minnows that I remain very positive on.

Cheap income

Copper, zinc and lead miner Central Asia Metals (LSE: CAML) is an example of a smaller stock that offers great dividends. Indeed, it’s telling that the total cash return for 2018 was the first thing commented on by the company in today’s full-year results.

A final dividend of 14.5p per share was declared, equating to a trailing yield of 5.6% at the time of writing. That may be less than the 16.5p returned in 2017 but it’s still 44% of the adjusted free cash flow generated by the company in 2018 and in line with its policy of returning between 30%-50%.

Payouts are currently well covered by profits — more than can be said for some of the biggest London-listed companies — and, based on the company’s outlook, I can’t see this situation changing anytime soon. 

Revenue from Central Asia Metal’s two low-cost mines almost doubled in 2018 to $204.2m.

Earnings before interest, tax, depreciation and amortisation (EBITDA) came in at $125.3m — 132% higher thanks to acquisition and contribution of its Sasa mine. That’s a particularly good result considering the average 20% fall in the basket price of the company’s base metals over the period.

Looking ahead, the £469m-cap chose to stick to its previous guidance on production for 2019 but also highlighted that capital expenditure at Sasa would be around $10m lower. 

Since I’m generally averse to companies owing a lot of money, I also really liked the near-21% reduction in net debt (to $110.3m) from the previous year.  

Despite appreciating in price recently, shares in Central Asia Metals trade on a trailing price-to-earnings (P/E) of a little under 11, according to my calculations. That suggests pretty good value to me.

Dependable dividends

Another small-cap that I’ve liked for some time is kettle safety control manufacturer Strix (LSE: KETL). 

Last month’s final results highlighted a “solid performance during 2018“, with revenue increasing by 2.7% to £93.8m and pre-tax profit 3.2% higher at £29m.

Particularly noteworthy was the continued growth in demand for the company’s Aqua Optima filtration products in the UK.

In addition to this, the business still managed to maintain its 38% share of the kettle control market, supported by eight successful defences of its intellectual property.

Like Central Asia Metals, Strix is also working hard to improve its balance sheet. Net debt was reduced to £27.5m by the end of last year — just over 40% less than in December 2017. 

And the dividends?

Strix confirmed a total payout of 7p per share, which gives a really-very-reasonable trailing yield of 4.4%. 

Having bounced back a little over 20% from its mid-December low, I wouldn’t be surprised if the share price lost a bit of steam for a while.

At 11 times forecast earnings, however, I also suspect those buying an initial stake today will still be richly rewarded in time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns no 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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