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Have £5k to invest? 3 cheap small-caps yielding 5%+ I’d hold in my ISA for 10 years

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It’s somewhat surprising to see Devro’s (LSE: DVO) share price sink to its cheapest since February in recent sessions. More fool the market, I say. I reckon this sharp slump makes the sausage casings maker a brilliant buy today.

City expectations of a 14% earnings jump in 2019 leave it trading on a dirt-cheap forward P/E ratio of 10.2 times. What’s more, predictions of strong bottom-line growth this year and next lead to suggestions that dividends will keep growing too, giving Devro monster yields of 5.5% and 5.8% for these corresponding years.

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I’ve long lauded the small-cap’s Devro 100 programme designed to slash costs, improve sales processes and supercharge new product revenues in fast-growing regions like China and the US. The measures put Devro in pole position to create brilliant profits growth as sausage demand bulges across the globe — recent data from Statista suggests that annual volumes of hot dogs and sausages will hit 6.4bn kilograms by 2021, up 14% from 2014 levels.

Another 5%+ yielder

Ten Entertainment Group (LSE: TEG) is another small-cap riding a terrific structural opportunity, in this case the renaissance of ten-pin bowling in the UK.

This was apparent in half-year results unpacked last month, results which showed revenues up 10% in the six months to June and adjusted pre-tax profits leaping 14%. Ten Entertainment isn’t content to sit on its hands and is investing heavily to capitalise on this bright trading landscape.

It intends to continue adding to its network of alleys the length and breadth of the country. And by rolling new concepts like the ‘HyperBowl’ high-adrenalin format and other measures to improve the customer experience (it has signed a deal to trial the madly-popular Escape Rooms at its sites), it’s aiming to attract even more families and groups through its doors.

City analysts expect earnings here to grow by double-digit percentages over the next couple of years, leading to a rock-bottom forward P/E ratio of 13.2 times and, as at Devro, expectations of some strong dividend hikes as well. Thus yields at Ten Entertainment sit at 4.5% and 5.2% for 2019 and 2020 respectively.

Flooring it

Headlam Group (LSE: HEAD) might not be for the faint of heart, the company suffering right now from a mix of tough trading conditions in the UK and softer activity in Continental Europe too. In fact these troubles are expected to create the first annual earnings dip at the floor coverings giant for donkey’s years in 2019.

I would argue, though, that the long-term outlook for Headlam remains quite compelling. It appears as if trading has ‘bottomed out’ in both its major markets, with like-for-like sales rising by a muted-if-welcome 1.8% and 3.2% in Britain and Continental Europe respectively in the six months to June. And by implementing a variety of back-office measures to improve stock availability and boost warehouse space, and with work to open a new distribution hub in Ipswich by next spring also well under way, I’m backing it to thrive over the next decade.

Right now Headlam boasts a rock-bottom forward P/E ratio of 11.7 times and chunky dividend yields of 5.5% for 2019 and 5.7% for 2020. I reckon it’s a brilliant contrarian buy at recent prices.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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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