Here, I’ll highlight three small-caps offering dividend yields of 6% or more – including two stocks from my own portfolio.

A recovery story?

Epwin (LSE: EPWN) produces housebuilding products such as doors, windows, cladding and decking. The last couple of years have been tough, due to slower conditions across the UK’s housing market. Fortunately, Epwin has remained profitable and in good financial health through this period, recently reporting increased annual profits.

The risk is that conditions could remain weak or even worsen if the UK suffers a recession. However, I think the picture could be improving. Recent government data showed a 17% increase in shipments from UK brick factories during the first quarter of this year.

Builders may order bricks for a new home before they order doors and windows. But if more bricks are being sold, I reckon there’s a good chance that more doors and windows will be needed over the next 12 months.

Epwin currently trades on eight times forecast earnings, with a 6% dividend yield. I reckon that’s worth considering.

A niche business yielding 8%

Currency management expert Record (LSE: REC) isn’t a household name. Some of its largest customers are Swiss pension funds. In total, the company’s customers trust it to provide currency hedging and related services for more than $100bn of underlying investments.

We can get an idea of the value attached to its services by looking at its accounts. Last year, Record reported a 27% operating margin, generating a return on equity of more than 30%. These excellent figures are fairly typical for this business.

When a company can consistently generate this kind of profitability, my experience is that it usually offers a service its customers value highly.

Perhaps the main risk is that historic growth has often been slow and inconsistent. Recent performance has improved, but there’s no guarantee this will continue. However, Record’s 8% dividend yield looks safe to me. It’s also high enough for me to be relaxed about the risk of slow growth.

A 9.9% yield!

Sabre Insurance (LSE: SBRE) is a niche operator in the UK motor insurance market, focusing on higher-risk drivers and lines such as motorcycle and taxi insurance.

The advantage of this model is that Sabre’s less exposed to competition from price comparison and large brands. The firm’s customers require more skilled underwriting, but profit margins are higher to reflect the extra risk.

As a potential investor, my main concern is that the company’s core market is relatively small. One area currently being targeted for growth is to offer cheaper insurance to less risky drivers, while also accepting slightly lower profit margins. This could work well – but there’s a lot more competition in this area, so careful judgement will be needed.

Broker forecasts for 2025 show Sabre with a dividend yield of 9.9%, covered by earnings. This business looks interesting to me and is on my list for further research. I think it could be worth considering for passive income.

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As you can see, each of these companies provides a dividend yield way north of the 3.5% FTSE 100 average. If City forecasts are accurate, a £15,000 investment spread equally across them would provide me with an £1,155 passive income in 2025.

I think these big-paying shares will grow dividends strongly over the long term too. Here’s why I’m considering adding them to my stocks portfolio.

The REIT

Penny stocks are usually sought after for their excellent growth potential. But in the case of Alternative Income REIT, this is a share that could prove to be a top pick for dividend income.

This particular small-cap is a real estate investment trust (REIT). As such, it must pay at least 90% of annual rental revenues out in the form of dividends.

Alternative Income rents out a wide variety of properties like hotels, gyms, hospitals and residential apartments. It also has tenants tied down on long contracts (its weighted average unexpired lease term is above 16 years).

Combined, these characteristics give the company strong cash flows across the economic cycle, a critical factor for reliable long-term dividends. That said, it’s worth remembering that earnings and asset values are sensitive to interest rate movements.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

The miner

Mining stocks often have wild dividend histories. When commodity prices drop, dividends usually follow suit as profits invariably dip.

Yet despite this danger, City analysts expect Central Asia Metals — which owns copper and lead-zinc assets in Kazakhstan and North Macedonia respectively — to still pay a large dividend in 2025.

They also expect shareholder payouts to grow the year after. I believe the business could deliver solid capital gains and rising dividends over the long term, driven by megatrends like global urbanisation and the expanding green economy.

With cash in the bank of $56.4m as of June, Central Asia Metals has a strong balance sheet to help it pay those large near-term predicted dividends.

The materials supplier

Epwin Group provides a wide range of building materials. These include doors, windows, cladding and drainpipes. As a consequence, it’s in good shape to capitalise on a possible housebuilding boom in the UK. The new Labour government has vowed to build 1.5m new homes through to 2029.

But Epwin isn’t solely dependent on the new-build market to drive profits and dividends. It also supplies considerable volumes to the repair, maintenance and improvement (RMI) market. Given the age of Britain’s housing stock, this should support earnings for years to come.

City analysts expect profits and dividends here to rise every year to 2026 at least. This is despite the danger that interest rates may remain around current highs and limit new homes demand.

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So for long-term buy-and-hold investors like we Fools, which penny shares might one day be household names? Here’s what some of our contributors think!

CleanTech Lithium

What it does: CleanTech Lithium is an AIM-listed lithium exploration company that owns three strategic projects in Chile.

By Charlie Carman. There’s a strong case to be made that lithium will be the 21st century’s indispensable commodity due to the metal’s industrial applications in electric vehicle batteries. CleanTech Lithium (LSE:CTL) is well positioned to benefit from growing demand.

The company plans to use Direct Lithium Extraction technology (a process involving an absorbent to extract lithium from a brine solution) in conjunction with Chile’s renewable energy grid to ensure its production is carbon-neutral.

However, the business faces notable risks. First, it’s at a pre-revenue stage. In addition, President Boric’s recent announcement that private companies will be required to partner with the government in exploiting Chile’s lithium is a cause for concern.

Nonetheless, CEO Aldo Boitano has assured investors that CleanTech Lithium continues to have “very positive discussions” with state entities.

Overall, the company’s solid ESG credentials and the absence of competing projects in its key locations suggest it could have a bright future.

Charlie Carman does not own shares in CleanTech Lithium. 

Epwin Group

What it does: Epwin Group sells building products, including energy-efficient windows, doors, and conservatories.

By Dr James Fox. Epwin Group (LSE:EPWN) produces energy-efficient and low-maintenance building products. And given the downward pressure in the housing market, it’s no surprise the stock is trading far below its 2021 peak. At the time of writing, the market cap was just below £100m.

So, what makes this company exciting? Well, its energy-efficient products remain popular due to medium and long-term drivers, including a shortage of affordable housing, concerns about existing housing quality, and efforts to improve the energy efficiency of British homes.

In a May trading update, Epwin said revenue was running 3% higher than last year – 2022 was a record year for revenue. Amid a testing environment for the housing market in 2023, this is an outstanding achievement, and a testament to the strength of its offering.

Naturally, even higher interest rates represent an unfortunate headwind, but one that should ease in 2023. Despite this, all the signs point towards a bright future ahead.

Dr James Fox does not own shares in Epwin Group.

Kodal Minerals 

What it does: Kodal Minerals is a lithium-focused miner, with its attention predominantly fixed on West Africa.  

By Charlie Keough. Investors in Kodal Minerals (LSE: KOD) will be ecstatic with the stock’s 150%+ rise in 2023. And I think it could be on its way to becoming a future stalwart.  

With a focus on lithium mining, the business is placed in a market that is set to grow massively in the years ahead. Lithium is a key component for products such as electric vehicles and phones. And as such the global lithium market is predicted to grow at a compound annual growth rate of over 15% between now and 2030.  

The business also owns the Bougouni mine in Mali, which at full capacity can produce 220,000 tonnes of spodumene (a lithium-rich mineral) every year. Moreover, the recent $100m investment into the Bougouni project by China’s Hainan Mining also highlights its potential. A recent positive drilling update, where Kodal spoke of Bougouni’s potential “additional prospects” reinforces this.  

The biggest risk with Kodal is geopolitical tensions. With China holding a strong grip on the market, the West may veer away from lithium. However, from a long-term view, I think Kodal could be a future stalwart.  

Charlie Keough does not own shares in Kodal Minerals or Hainan Mining.  

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But they also have the potential to be financially rewarding investments due to their small size. Here, I’m going to consider whether I should buy two unloved penny stocks currently trading at 52-week lows.

Podcasts

The first stock is podcast developer Audioboom (LSE: BOOM). I’m familiar with this stock as it’s been on my watchlist for a couple of months now. Unfortunately, it’s fallen 28% in that time, and is down a massive 76% over the last year.

What’s gone wrong here?

Well, the shares had already taken a hit due to concerns about a slowdown in global advertising spend. And the company’s first quarter confirmed these fears, as its underlying earnings plunged from $900,000 last year to $200,000.

Audioboom’s chief executive Stuart Last said that “in the medium to long-term, we are confident that brands continue to trust podcasting as a key part of their marketing strategy“.

He also expects the group to deliver year-on-year growth as the ad market recovers. However, the US is still teetering on the edge of a recession this year, so it’s possible that companies could keep a lid on their ad spend.

This remains a risk for the stock, given the fact that the firm is struggling to eke out a profit as it is.

That said, I remain bullish on the future of podcasting around the world. Plus, Audioboom recently renewed a multiple-year deal with Formula One to produce, distribute, and monetise its extremely popular official podcasts.

I’m going to keep the stock on my watchlist for now, as it could be an interesting turnaround play, assuming the US avoids a recession.

Low-maintenance building products

Epwin Group (LSE: EPWN) is another stock on my watchlist. But unlike Audioboom, this is a company that is regularly profitable. Indeed, the stock is trading on a forward price-to-earnings (P/E) multiple of just 7.2, which demonstrates how unloved it is.

The reason isn’t hard to fathom. The Solihull-based firm sells building products, including energy-efficient windows, doors, and fascia systems, at a time when the property market is in the doldrums.

The risks are clear, but already seem more than priced in considering the stock has fallen 40% in 18 months.

Yet the business remains resilient, as it announced last week that current revenue is running 3% higher than this time last year. And the intense inflationary pressures it has faced for the past two years, particularly for raw materials like PVC resin, appear to be easing.

The company has low net debt and is operating in an industry with favourable long-term tailwinds. The biggest of these relates to the UK’s need to decarbonise its ageing housing stock to meet its net zero ambitions.

The group’s products have inherently strong environmental credentials, and would seem likely to be in high demand over the coming years.

Plus, the stock comes with a dividend yield of 7%, with the prospective payout covered two times by earnings. I think I’m going to promote this penny share to my buy list in the coming weeks.

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Epwin Group

Epwin Group (LSE: EPWN) is a small-cap stock capitalised at just £111m. The West Midlands-based group is a vertically-integrated manufacturer of energy efficient and low-maintenance building products.

These include high-quality PVC windows and doors, cladding, guttering, decking and prefabricated building components. It supplies these products to the repair, maintenance and improvement, new build and social housing sectors.

Obviously, the UK housing market is going through a correction at present, and the risk is things could get worse from here. Epwin’s sales could take a hit, depending on how long this slump lasts.

However, this risk is already reflected in the share price, which is down 36% in 18 months.

This leaves the shares trading on a dirt-cheap price-to-earnings (P/E) multiple of 8.2. And investors are rewarded with a dividend yield of 5.8% for taking on the risk.

Despite a shaky housing market, last year’s profits were in line with expectations and trading has been robust so far in 2023. Analyst consensus for this year is for over £360m in sales, around £20m in profits, and a dividend of 5.0p per share.

With the shares currently at 77p, that would represent a yield of 6.3%.

Longer term, millions of new houses will need to be built in the UK, and they’ll all need kitting out. This should underpin rising profits at Epwin. That’s why I’m adding this value stock to my own portfolio soon.

Alphabet

It seems strange to be associating deep-value status to tech juggernaut Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). The parent company of Google and YouTube has historically traded at a premium to the rest of the US stock market. Until now, that is.

Today, the search giant sports a P/E of 19.8. On a forward-looking basis, that could drop to around 17. That means the stock is currently the cheapest it’s ever been.

Of course, the stock is cheap because there are risks here. The firm is facing well-documented competition from artificial intelligence (AI) chatbot ChatGPT. And a cyclical slowdown in digital advertising isn’t helping.

But the company is a pioneer in this space, having developed (but not released) its own AI chatbot technology years ago. So I fully expect it to incorporate its own generative AI into all of its main products, possibly within weeks.

Its Google Cloud business delivered 32% year-on-year revenue growth in Q4. In 2022, cloud revenue amounted to over $26bn, accounting for around 9% of group revenue.

Sales from its Pixel phones are growing, and a Pixel Watch was launched last year. Plus, there are future initiatives like self-driving vehicle technology and quantum computing. These aren’t priced into the stock today — but could be one day if either project is successful.

The company remains a free cash flow-generating machine. It had over $113bn in cash, cash equivalents, and marketable securities at the end of 2022. This gives it an enviable position to fund its ‘Other Bets’.

I think talk about the end of its dominant competitive position is premature. That’s why I recently snapped up some shares.

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The FTSE 100 topped 8,000 points for the first time last week, enjoying its day – or maybe summer? – in the sun after years of underperformance. Likewise, the domestic-focused FTSE 250 has bounced back from its miserable 2022.

So my bargain-hunting has led me to small-cap stocks. And Epwin Group (LSE: EPWN) has caught my eye.

Discounted stock

Epwin is a UK-based door and window manufacturer. It makes and markets PVC and aluminium windows, as well as cladding, decking, and other associated products. The firm supplies the repairs, maintenance, and improvement, new build, and social housing sectors. It has a large network of merchants, plastics stockists, and window and door installers.

Its shares are listed on the Alternative Investment Market (AIM). At 78p a share, the company sports a market cap of £113m.

The share price has declined 26% over the last 12 months. That leaves the stock trading on a price-to-earnings (P/E) ratio of around 8.4. That’s about half the market average P/E, according to my data provider.

Yet there’s nothing in the financials suggesting to me that such a large discount is warranted. Far from it, in fact.

Robust trading

In its year-end trading update published last month, the group reported that revenue increased 8% year on year to approximately £355m. This was largely driven by raising prices to cover cost inflation, as well as bolt-on acquisitions completed in the year, which contributed £4m in revenue.

As a result, the company expects to report annual adjusted profit before tax of about £16.3m. That’s in line with market expectations, and an increase over 2021. 

I’m encouraged that the company is successfully demonstrating its ability to increase prices and preserve profits. After all, it’s no secret that the macroeconomic environment has been challenging for many UK-focused businesses.

The stock pays a dividend, with a current yield of 5.4%.

Optimism and uncertainty

Management also announced that trading in 2023 has remained robust so far. It remains confident of continued profitable growth over both the medium and long term. 

A core part of Epwin’s growth strategy is to complete selective, value-enhancing acquisitions. It’s been busy on that front recently, buying Hampton Decking (a private composite decking company) for around £4m in December. It also acquired PVC-recycling firm Poly‐Pure back in September for an initial cash consideration of £15m.

Of course, the company is facing headwinds operating in a sluggish and uncertain UK economy. But I think that uncertainty is probably already priced into the stock. It may be cheap, but I think there’s value here.

Looking forward, analyst consensus for this year is for over £360m in sales, around £20m in profits, and a dividend of 5.0p per share. If that payout was met, which isn’t guaranteed, that would represent a forward dividend yield above 6%.

All things considered, these cheap shares look attractive enough to go on my March buy list.

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They are also often put off as these cheap shares often have less financial robustness. This can hamper their ability to pursue future growth opportunities and survive any trading troubles.

More fool them, I say! As a long-term investor, I’m not discouraged by the possibility of a little share price turbulence. What’s more, with the right research, it’s possible to find well-funded companies with exceptional profits outlooks. Indeed, here are a couple of top ‘nearly’ penny stocks on my radar right now.

Soaring sales

I’m thinking of bulking up my exposure to the robust housing market by buying shares in Epwin Group (LSE: EPWN). This particular penny stock manufactures PVC doors, windows, cladding, guttering and wide range of other building products. So it is thriving, thanks to buoyant housebuilding rates and a healthy repair, maintenance and construction market (RMI).

Conditions in the RMI sector are particularly bright right now, and this pushed sales at Epwin 69% higher in the six months to June (and 13% higher compared with the same 2019 period). Encouragingly, the business has continued to invest to capitalise on the fertile conditions across its end markets too.

It completed on a new distribution and warehouse facility in the first half, acquired while it also bought plastic building product specialists PBS and SBS earlier in 2021.

City analysts reckon Epwin’s earnings will soar almost 300% this year and by another 23% in 2022. As a result the ‘nearly’ penny stock (which trades at 111p per share) carries a price-to-earnings growth (PEG) ratio of 0.5 for next year. I think Epwin’s a great buy despite the more immediate threat of rising component prices to its cost base.

Another great way to ride the construction boom

Keeping the building materials theme going, Michelmersh Brick Holdings (LSE: MBH) is a stock I expect to thrive during the housebuilding revolution. I own shares in its brickmaking counterpart Ibstock to make money from this construction boom. And I’m thinking of snapping up this industry giant too at current prices of 130p.

City researchers reckon earnings here will rise an extra 9% in 2022 following the 52% jump anticipated for this year. Consequently, Michelmersh changes hands on an undemanding forward price-to-earnings (P/E) ratio of 14.5 times, at current prices. I think this is particularly good value given that, according to fresh trading numbers this week, trading here continues to surpass expectations.

I’m expecting demand for new houses to continue rocketing, thanks to the enduring blend of lower-than-usual interest rates, generous government support for first-time buyers, and intense competition among mortgage lenders. So does the government, which plans to build 300,000 new homes a year by 2025.

I’d buy Michelmersh even though extreme labour shortages could hit housing construction rates and subsequently dampen demand for the company’s bricks.

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This isn’t to say there aren’t a few winners out there, particularly after the year we’ve had on the markets. Here are three one-time penny stocks now requiring me to dig a bit deeper in my pockets.

Trading “materially ahead”

Market minnow Epwin (LSE: EPWN) manufacturers extrusions, moldings and fabricated low-maintenance building products. That may sound deadly dull, but I don’t think those buying the stock a year ago will be complaining. The share price has climbed nearly 70% since then. 

Back in July’s trading update, the company said revenue over the first half of 2021 had been 69% up on 2020. That’s not altogether surprising considering how bad things were last year. However, the £157.8m logged was also 13% ahead of 2019’s figure. Accordingly, management now expects full-year adjusted pre-tax profit to be “materially ahead” of previous expectations. 

However, there are still risks ahead. Supply chain issues and inflation are impacting a lot of businesses right now and Epwin’s no exception. So far, it’s been able to navigate these headwinds, but things could get worse before they get better.

Then again, the shares are still trading at a reasonable valuation price of 17 times forecast earnings for me to consider buying now. A 2.9% dividend yield easily covered by profit is another positive for me. 

Robust demand 

SigmaRoc (LSE: SRC) is another former penny stock whose shares are now trading (just) over a pound. Like Epwin, the construction materials company has clearly benefited from the revival in property over the last year. Its share price is up almost 140% since August 2020. 

Bar a prolonged market stumble, I can see this momentum continuing. Back in May, the company announced that trading had been “ahead of internal expectations“, thanks to strong private-sector demand and some large-scale infrastructure projects commencing. Since management will always be closer to the business than analysts, I take this as a buy indicator when looking for stocks for my own portfolio.

SigmaRoc has also been on an acquisition spree, buying three businesses in Belgium. More recently, it’s announced a reverse takeover of limestone developer Nordkalk for approximately €470 million. 

Half-year numbers are due on 6 September. In the meantime, the shares trade on a valuation of 19 times forecast earnings. One potential downside however, is the lack of dividends. 

Former penny stock

A final former penny stock worth mentioning is Sirius Real Estate (LSE: SRE). The company is a leading owner and operator of offices, business parks and industrial complexes in Germany.  The FTSE 250 member has also proven itself to be a great investment. The shares are up 63% over the last year. 

Of all three one-time penny stocks mentioned, SRE is probably the one I’d prioritise buying due to its arguably more diversified earnings stream. That said, it’s also the most richly valued, potentially making it riskier. A valuation of 24 times forecast earnings suggests quite a lot of good news might be priced in.

Having said this, I do wonder if there could be more upside ahead as people gradually return to their offices. Sirius seems confident, having recently snapped up four business park assets and one land parcel for around €85m. The shares also yield 2.9% this year, according to analyst projections. 

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I’ve written about the stock several times over the past few years. And the main attractions have always been a cheapish valuation and a high dividend yield. But with the share price near 97p, the forward-looking yield for 2021 is as low as about 2.8%.

This small-cap stock’s business is bouncing back

The figures in today’s report show what a thump the business took from the pandemic. Revenue declined by almost 15% in 2020 and adjusted earnings per share collapsed by just over 61%. But the worst figure, in my view, is that net debt rose from just over £80m to almost £97m.

Epwin must do a lot of profitable trading in the good times that are hopefully coming if it is to pay down that big load of borrowing in time for the next economic downturn. I wouldn’t want to see the business plunge into another recession this top-heavy with debt.

And perhaps the biggest problem with the stock is that underlying operations are cyclical. Epwin makes and supplies PVC, doors, windows, cladding, guttering, decking and other stuff for the new-build and maintenance markets. And the industry is notorious for its cycles of boom and bust.

But in fairness, the business is bouncing back from the challenges of 2020. Revenue in the second half of last year came in 4% higher than the 2019 figure. And underlying operating profit was just below that of 2019. The directors reckon demand is recovering fastest from the renovation, maintenance and improvement market. The company is seeing a slower return to normal levels of demand from the new-build and social housing sectors.

Strong revenue but earnings falling short

However, despite forecasting a triple-digit percentage rebound in earnings for 2021, City analysts still expect them to fall well short of 2019’s level. But despite that, the share price is already near its 2019 peak. And I see that as a negative when considering the stock now.

But maybe there’s a good reason for the strength of the shares. The company reckons the 2020 H2 business recovery has continued into 2021 “with stronger than anticipated demand” in the first quarter. The directors said revenue is beating 2019’s performance.

However, its supply chains are “under pressure” because of the pandemic and the acceleration of demand that has emerged now. There are some shortages of PVC raw materials and the price of resin has been driven up to all-time highs. Epwin is aiming to recover its extra costs by raising selling prices to customers.

Although I think there’s a long-term tailwind behind the infrastructure and building markets, I’ve cooled on Epwin. It’s possible the business and the stock could embark on a multi-year climb from here. But neither the financial record nor the shares have progressed much overall for the past six or seven years. So I’m looking elsewhere for long-term small-cap stock opportunities.

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I’d rather invest in a ‘real’ business. And one company delivering a consistent performance right now is building products manufacturer Epwin (LSE: EPWN). What’s more, the dividend yield is knocking on the door of 7% with no sign of a cut down the road. Meanwhile, the share chart shows a period of consolidation and the valuation looks low. I think the stock is worth deeper research.

Overcoming previous problems

The dividend did receive a 27% haircut in 2018, but City analysts following the firm have pencilled in increases for 2019 and 2020. Trading conditions around 2017 and 2018 were difficult when the firm lost two of its largest customers, closed its plant in Cardiff, and took an additional hit to profits because of unrecovered material cost inflation. Thankfully, things have improved since then and the company looks like it’s in recovery-mode to me.

Epwin makes PVC windows, doors, cladding, guttering, decking and prefabricated GRP building components serving the new-build and maintenance markets. You don’t need me to tell you the business is therefore cyclical in its nature. But I’m not writing off Epwin just because of that. Some cyclical firms can make jolly decent investments if you catch them right, and Epwin appears to be holding its own and trading well today.

This morning’s half-year results report reveals revenue for the first six months of the year came in broadly flat compared to the equivalent period last year. Underlying operating profit rose almost 11% and adjusted earnings per share shot up nearly 15%. I’m encouraged by those figures and so, it seems, are the directors who raised the interim dividend by almost 3%.

Nipping and tucking

The company is engaged in a consolidation and rationalisation programme aimed at reducing from seven operating units down to two on its site in Telford. The goal is to have the site developed and operational in the first half of 2020, which will “significantly” improve the logistics and finishing operations of the Window Systems business and enable the growth and development of the firm’s new aluminium window system operation, which was launched in May.

Epwin also disposed of its “non-core” glass sealed-unit manufacturing operation during the beginning of the year and acquired a decking installation business in February called PVS. My guess is such nipping and tucking will put the firm in better shape to achieve growth in the years ahead.

With the uncertainty of Brexit soon to be behind us, I reckon firms such as Epwin have a good chance of thriving. And with the share price near to 78p, the forward-looking earnings multiple for 2020 sits just below seven, which strikes me as undemanding.

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