Although there are many well-established, large companies listed in the UK’s leading index, there are just as many smaller companies outside of the Footsie that pay above-average dividend yields.

Dividend-paying UK shares

For instance, PayPoint (LSE:PAY) is listed on the FTSE SmallCap index and it yields over 6%. That sounds pretty good, but it’s never just about the dividend yield to me. I’d want to see multiple reasons to invest before I’m ready to push the button. Does it have what it takes? Let’s take a look.

This technology services business runs payment terminals across a large network of convenience stores. It enables millions of consumers to make and receive payments. In addition, its e-commerce services allow customers to conveniently pick up and drop off parcels.

The trend to shop locally should continue, in my opinion. That should support footfall in shops and possibly drive more customers to use PayPoint’s services.

There’s one thing to consider though. As more bill payments move online, this part of the business could decline, which is a risk. But I believe such a decline could be offset by growth in the parcel business.

Should I buy?

PayPoint’s above-average dividend yield is supported by strong cash flow and a sound balance sheet. I also like that it has an 18-year history of distributing dividends to shareholders.

I have to bear in mind that its share price performance has been lacklustre over several years. And I’d by no means call it a growth stock. That said, it looks relatively stable. Despite many shares taking a tumble, Paypoint has managed a 3% gain over the past year.

With a price-to-earnings ratio of just 10, this share looks cheap to me. And all things considered, I’d buy it for my Stocks and Shares ISA.

A high-quality business

Another small company with a 6% dividend yield is Jarvis Securities (LSE:JIM). With a market capitalisation of just £98m, this online stockbroker is relatively small. But it has several qualities that stand out to me.

For instance, it’s a growing, high-quality and high-margin business. It recently announced a set of record-breaking results, for a third year running. Profits rose by 12% in 2021, and the profit margin was high at over 50%.

Jarvis is cash-generative and is good at distributing profits to shareholders in the form of dividends. Like PayPoint, it holds a double-digit record of consecutive dividend payments. That’s exactly the kind of reliability I look for in the best dividend shares.

Skin in the game

When looking for suitable investments, I often look at whether senior management team members own shares in the business. Jarvis certainly stands out here. The CEO and his family own more than 50% of the shares. I consider that to be remarkable ‘skin in the game’.

But I need to be aware that as the stock market takes a tumble in the near term, Jarvis could potentially see fewer transactions than last year. That said, it’s a diversified business with ample experience to manage through testing times.

Overall, I’d happily buy these shares for my own long-term portfolio.

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Small-but-mighty dividend shares

I reckon one such opportunity is Jarvis Securities (LSE:JIM). I’ve been watching this stockbroking company for a while and I like what I see. Not only does it offer a 5% dividend yield, but it also offers growing sales and earnings. On average, earnings have grown by 16% per year over the past five years, and they’re forecast to grow by 23% per year over the next five years.

It’s great to find dividend shares with a solid track record. And Jarvis certainly ticks that box — It has regularly been paying dividends for over 15 years.

Jarvis is a relatively small company with a market capitalisation of just over £130m. But in many ways, I’d say that’s a good thing. Smaller companies are often overlooked by larger funds. That creates opportunities for private investors like myself that look to unearth hidden gems.

One thing to bear in mind, however. Jarvis operates in a competitive industry and against some much larger players. It will need to ensure its product and services continue to provide value to new and existing customers.

Flat floors, fat profits

Another ‘super-cheap’ dividend share that I’d buy today is Somero Enterprises (LSE:SOM). I reckon this industrial equipment manufacturer is another relatively unknown hidden gem. It makes specialist laser-guided machines that are used to create perfectly flat concrete floors. It’s the kind of flooring that’s used in warehouses, data centres and other multi-storey buildings.

As with Jarvis, I like that Somero’s sales and profits are growing. It offers a 5% dividend yield and has reliably paid dividends for almost a decade. Quite often I find that dividend shares don’t offer much in the way of growth prospects as they tend to be more mature companies. But I feel Somero has much further to grow. The recent $1.2trn US infrastructure deal could help too.

But I have to note that Somero operates in a cyclical industry. The next recession could lead to a drop in demand for its machines. I’d also look out for copycats that try to imitate its equipment. Although it works hard to protect its patents, it’s something I stay aware of.

Overall, I really like it though. It’s a high-quality, high-margin, generous dividend-payer that looks cheap to me. And I’d certainly consider it for my portfolio.

Both Jarvis and Somero offer an above average dividend yield, easily beating the current FTSE 100 dividend yield of 3.4%. Occasionally, I find top dividend shares like these that also offer ample growth potential. For me, that’s a strong combination.

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It is also good news for stock brokers, who usually see a substantial uptick in commission revenue when volatility increases as investors either buy or sell to take advantage of market movements.

This means that companies such as Jarvis Securities (LSE: JIM) should see a substantial uptick in their trading revenue and profitability during the first quarter of 2018, thanks to the volatility of the past few weeks.

Continued momentum 

For Jarvis, a successful first quarter will only extend the company’s run of good luck. Over the past five years, the firm has grown reported earnings per share by 14% per annum on average as it’s continued to attract new clients. And it turns out 2017 was “the most commercially successful year at Jarvis by some margin“, according to the full-year results release published today.

In the release for 2017, Jarvis saw a 22% increase in profit before tax and a 22% rise in earnings per share (City analysts had only penciled in EPS growth of 2.4% for 2017). This growth has given management the confidence to increase its dividend payout to shareholders by 34%, reflecting both positive current trading and an equally positive outlook for the group going forward.

Unfortunately, it seems the market doesn’t like these results as much as I do. The shares have been marked down by more than 10% in early deals. However, I believe this could present an excellent opportunity for long-term investors. Indeed, if Jarvis can continue to grow at its current rate, it should continue to generate enormous returns for shareholders going forward. 

Undervalued growth 

Based on current City estimates, shares in Jarvis are trading at a forward P/E of 17. Considering the EPS figure of 32.4p reported today is 2% above what analysts were expecting for 2018, I believe that this valuation severely understates the firm’s outlook. What’s more, there’s around 120p of cash on the balance sheet. 

These figures imply that the company is trading at a 2017 cash-adjusted P/E of only 11.4, which looks to me to be exceptionally cheap for a firm growing EPS at a double-digit rate.

Another company I’m waiting to buy is Macfarlane Group (LSE: MACF). The business, which designs, manufactures and distributes packaging products, flies under the radar of most investors, but it deserves extra attention.

Over the past few years, this company has gone from strength to strength as it has reinvested cash from operations back into the business. Net profit has grown at a rate of around 12% per annum for the past five years, and it’s increased its dividend distribution every year since 2012. 

At the time of writing, the shares support a dividend yield of 2.1% this year, which isn’t that impressive but they also trade at a forward P/E of 11.9, which looks cheap for a company that has a record of growing earnings at more than 10% per annum. 

Since the beginning of 2013, shares in Macfarlane have returned a total of 222% for investors, excluding dividends. Looking at current City forecasts, I believe that these returns can continue as the company builds on its existing successes.

The post 2 stocks I’m waiting to pounce on in this market appeared first on The Motley Fool UK.