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Why I’d buy this overlooked dividend stock today after a 15% share price rise

Folks often think ‘big company equals dividends, small company equals growth’. It’s probably a reasonable generalisation, but there are many that don’t fit the equation, and one I’m looking at today is corporate insolvency specialist Begbies Traynor Group (LSE: BEG).

Fellow Motley writer Roland Head has suggested the fallout from Brexit could provide Begbies Traynor with rich pickings as a company that can expect to do well when others suffer. And that could well be true, as a trading update Tuesday sent the shares soaring 15%.

Beating expectations

After a strong final quarter, the company told us “we now expect our revenue and profit for the financial year as a whole to be comfortably ahead of market expectations,” adding that “cash collection in the period was significantly ahead of our expectations, which has resulted in a year end net debt position of £6m.”

Debt is down from £6.3m at the halfway stage which, in turn, had fallen from £6.9m a year previously. That’s pleasingly heading in the right direction and is around the same level as the firm’s annual adjusted pre-tax profits. It’s not something I’d worry about, but I’d be cautious of any future uptick.

Outlook

Executive chairman Ric Traynor said: “We enter the new financial year with a strong order book and favourable market conditions, and are well placed to continue our track record of earnings growth.”

With annual dividends starting to climb ahead of inflation, and this year’s expected yield of 4.2% forecast to rise to 4.6% by 2021, I’m seeing a good long-term income stream here, coupled with a decent prospect for share price growth.

Big dividend

If you want to see a smaller company that’s throwing off cash, look no further than City of London Investment Group (LSE: CLIG). At the first-half stage, the emerging markets specialist announced a special dividend of 13.5p per share, on top of a 9p interim ordinary dividend, after recording a pre-tax profit of £5.2m. At the time, funds under management amounted to $5.1bn.

Cash stream

While it’s perhaps not always wise to rely on special dividends too strongly, the firm has been returning surplus cash to shareholders by such means for some years now. For the full year, City of London Investment is forecast to deliver a yield of 8%, with a smaller but still very attractive 6.8% on the cards for next year.

The firm has also been buying back its own shares, so it clearly seems to think they’re undervalued now. Looking at a forward P/E of 11.7, dropping to 10.8 for 2020, I think so too.

Risky segment?

With emerging markets likely to remain a volatile investing target, I do expect to see City of London Investment shares offering perhaps a rockier ride than some. But though they’ve shown bigger ups and downs than the FTSE 100 over the past five years, they’re happily 55% up over that period and way ahead of the index’s 6.6%.

I’ve always had half an eye on emerging markets, having lived in the East during the Asian Tigers period, and I think we could now be heading for a healthy decade. I’m tempted to invest a little of my pension pot in City of London Investment, but it would be cash I wouldn’t need for at least 10 years.

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Alan Oscroft 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.