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AIM dividends are booming! Should you ignore the FTSE 100 and buy these stocks for your ISA?

When searching for stocks, it can be tempting to go for the tried-and-tested and to simply sink your cash into some of the brilliant blue-chips on, say, the FTSE 100. But it can often pay to go a little left field in your hunt for big investment returns.

As an example, dividends from London’s Alternative Investment Market (AIM) breached the £1bn milestone for the first time in 2018, and data released today suggests another year of fresh highs in 2019 too.

AIM dividends to rise through 2020

According to Link Group’s AIM Dividend Monitor report, total dividends from the AIM market are set to fly to £1.3bn in 2019, up 16.8% year-on-year on a headline basis or 12% in underlying terms (i.e. excluding special dividends and currency effects).

And the financial services group expects them to keep rising in 2020 as well. A figure of £1.33bn is being touted, one which would represent a 2.3% increase in headline terms or a 6.9% rise on an underlying basis.

Discussing the figures, Link’s COO Michael Kempe said that “fewer AIM companies pay dividends than their main-market counterparts… because so many are still in their early capital-hungry phase.” He did add,  though, that “the proportion of AIM companies paying dividends [has] risen” and that “those coming to market are doing so” and these firms growing them rapidly too.

Yields fall flat

It’s great that AIM companies are paying dividends like never before. Indeed, AIM dividends have now tripled since 2012 whilst main market dividends have risen by a more sobre 45%. But does this make the market a happy hunting ground for those seeking moderate-to-strong income flows?

Link Group’s data suggests one thing: absolutely not. Right now, the average forward yield sits at just 1.5%, some way short of the 4.5% investors can get from the FTSE 100.

AIM companies are of course focused on growth and so rewarding shareholders with dividends is only a secondary consideration. But the difference between their yields and those of their bigger stock market peers is nothing short of colossal.

Time to stick with the Footsie?

Lower yields, though, are not the only reason why dividend hunters need to be careful when it comes to investing in AIM stocks today.

As Kempe of Link Group comments: “The value of AIM companies has fallen sharply over the last year, as investors raise the risk premium they demand to hold UK assets in the face of an uncertain, and potentially damaging, Brexit outcome.” It’s no surprise he adds that “any associated economic slowdown will certainly impact the ability of AIM companies to grow too.

By contrast, the beauty of investing in FTSE 100 shares right now is very clear. The international focus of many of these companies significantly lessens (or totally excludes) the impact of a struggling British economy on their profits. Many of them report in foreign currency and so stand to gain from the knock-on impact of a troubled UK on the pound. And they are also large and financially stable enough to withstand any hiccups that could dent earnings for a short or prolonged period of time.

I’m not saying that smaller stocks like those on AIM need to be avoided. But there’s no doubt that investors need to be extremely careful with loading up on them in the present climate.

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Royston Wild 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.