That means they may not be such a cheap deal come next year. But as always with income shares, the true test is in the sustainability.

Do they have what it takes to keep paying dividends in the long run? Let’s have a look.

Nexteq

Nexteq (LSE: NXQ) currently boasts a decent 4.7% yield with a payout ratio near 24%, indicating a sustainable dividend policy that’s well-covered by earnings. The price is down 20% in the past five years but has recovered 17% in just the past year alone.

The Cambridge-based technology solutions company reported a 7.8% slump in profits in its latest results, due to challenging market conditions. But CEO Duncan Faithfull lived up to his name, voicing confidence in the company’s long-term prospects due to high customer retention, ongoing innovation, and expansion into high-growth segments like gaming electronics.

Despite the recent revenue declines, the share price is up 36% this year. This growth is backed by a strong cash position and a low debt-to-equity ratio — both factors that help support dividend sustainability.

However, the earnings dip means the current price looks a bit overvalued. That would be my only concern, as it risks a mild price correction in the short term. Still, as far as cheap income stocks go, I think it’s worth considering.

Michelmersh Brick Holdings

Michelmersh Brick Holdings (LSE: MBH) is often viewed as a relatively defensive stock, focused on steady dividend payments and long-term sustainability. The brick manufacturer’s recent interim dividend of 1.6p is equal to last year’s, reflecting confidence in its cash flow despite some profit pressures.

Its payout ratio’s a bit high, at 80%, meaning it only retains 20% of profits to fund operations. But with an 11-year track record of uninterrupted payments, it certainly seems dedicated to rewarding shareholders. Encouragingly, cash coverage is excellent and it looks undervalued, with a forward price-to-earnings (P/E) ratio of only 10.9.

The company maintains a disciplined capital allocation strategy, balancing dividends and share buybacks while investing in well-equipped manufacturing sites to support future growth. It has a strong balance sheet with zero debt and good liquidity, enhancing dividend sustainability even in market downturns.

Still, there’s always the risk that fluctuating energy costs drag down margins, pressuring profits. Plus, the UK construction sector is inherently volatile, which could limit growth.

But overall, it’s one of the more stable dividend-paying penny shares on the market, so one worth considering, in my book.

Balancing risk

Penny stocks are seldom seen as a safe investment but those that pay sustainable dividends add an element of reliability. Even if prices dip in the short term, the dividends shore up the investment until markets improve. And when the prices are as low as these two, it makes for a very tempting offer.

It’s not every day that reliable, high-yielding penny stocks come along. So I think there may be a very real, untapped opportunity here. But as always, investors should only consider them as part of a well-balanced and diversified portfolio.

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Naturally, this demographic shift is going to provide a wide range of investment opportunities. With that in mind, today I’m looking at two stocks that potentially stand to benefit from the silver generation.

GlaxoSmithKline

It’s no secret that as people get older, their need for healthcare increases. In the US, healthcare spending on the elderly is around three times that spent on the general working-age population. As such, I think global healthcare company GlaxoSmithKline (LSE: GSK) looks well placed to benefit from this fast-growing demographic.

GSK specialises in pharmaceutical medicines, vaccines and consumer healthcare products. Its goal is to be one of the world’s most innovative, best performing and trusted healthcare companies. With a market capitalisation of £74bn, the company is a big player in the healthcare sector, and one of the largest companies in the FTSE 100 index.

GSK shares appear to offer value right now. After a strong run between early February and late August, in which the stock climbed over 25%, the healthcare giant’s share price has pulled back below 1,500p recently. That leaves the stock trading on a forward-looking P/E ratio of 13.4 at present, which I think is a fair price to pay for a slice in this global business. Another appeal is the stock’s huge dividend yield. With the company expected to hand out 80p per share in dividends to investors this year, the prospective yield is a high 5.4%. GlaxoSmithKline isn’t the kind of the stock that will make you rich overnight, yet as a long-term play on the world’s ageing population, I think it has considerable potential.

Quixant

Moving away from healthcare, other areas that could be set to benefit from an increase in retirees across the world include entertainment and gambling. One stock that looks interesting to me in this regard is small-cap Quixant (LSE: QXT).

Quixant designs and manufactures advanced hardware and software solutions for the global slot machine industry. The group shipped 52,000 gaming platforms in 2017, representing around 10% of the slot machines across the world that needed replacing. Based in the UK, but with operations across Australia, Germany, Italy, Japan, USA and Taiwan, the company has grown rapidly in recent years and long-term investors have been rewarded with 5-year share price growth of nearly 400%.

While half-year results released this morning were a little weaker than last year’s H1 results (revenue of $50.3m vs $56.9m, adjusted fully-diluted EPS of $0.0870/share vs $0.1169/share) due to an “unusually strong” first half of 2017, the company advised that it’s expecting a stronger performance in the second half of the year. It’s also on track to meet market consensus expectations for strong full-year revenue and profit growth. “The market across all our customers in gaming remains buoyant,” said CEO Jon Jayal.

Quixant shares currently trade on a forward P/E of 25.2. That’s a premium valuation, sure, but I don’t think that’s an unreasonable price to pay for the business considering its track record and ageing population-related growth prospects.

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Does this make it a great contrarian play? Today’s full-year results would suggest not.

Fair value?

Despite being in line with management and analyst expectations, the numbers certainly weren’t pretty. 

Revenue fell 2.3% to £691m in the year to the end of June with pre-tax profit tanking almost 41% to £50.1m.

Much of this appears to be the result of a low win margin and “extreme weather” impacting on the company’s Grosvenor casinos. Had it not been for a focus on cost control at its Mecca sites, one imagines the numbers would have been even worse. As they were, venue revenue and operating profit were both down, by 3.9% and 4.5% respectively. 

Arguably more concerning, however, was the slowdown in growth at Rank’s digital offering. A 9.9% increase in revenue may not sound bad, but any loss of momentum is troubling when you consider that more of us are going online for a gaming fix rather than visiting traditional bricks and mortar sites.

In truth, bright spots were few and far between. Aside from recent acquisition YoBingo “performing strongly“, a 25% reduction in net debt (to £9.3m) and a modest, 2.1% rise to the dividend were the only other things to catch my eye. 

Not that Rank’s board seems overly concerned, stating that it had “full confidence” in the company’s strategy and that expectations for its financial performance in the current financial year hadn’t changed.

Admittedly, at 11 times forecast earnings, stock in Rank is approaching what I consider fair value. The 4.5% yield looks secure for now and might be regarded as adequate compensation while relatively new CEO John O’Reilly does his best to turn things around and realise what he regards as the company’s “underlying potential“.

Time will tell if his tenure proves successful. Considering the huge competition it faces from online competitors, however, I still think there are better contrarian opportunities elsewhere in the market.

A screaming buy, Rank is not.

A growth-focused alternative

As long as you don’t mind high valuations and aren’t fussed about receiving much in the way of dividends, I think a far better gaming-related option at the current time would be Quixant (LSE: QXT).

Last month’s trading update from the computing platform and monitors provider contained few surprises with revenue and pre-tax profit being in line with management expectations for H1. Interim results are due on 19 September. 

Having traded within the 400p to 450p range for the majority of the last year, Quixant’s shares look fairly fully-priced at 23 times expected earnings. Nevertheless, there could be further upside ahead if — as CEO Jon Jayal suggests — revenue returns to its traditional second-half weighting. A PEG ratio of 1.4 for the current year also implies that the shares aren’t overly expensive considering the company’s growth potential.

In addition to this, Quixant’s return on the capital it invests — a key metric for determining a company’s quality — was also far higher last year compared to that achieved by Rank (31% vs 16%). Taking this and a robust balance sheet into account, I know which stock I’d prefer.  

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Quixant

£250m market cap Quixant (LSE: QXT) has been a wealth generating machine for investors since it floated back in 2013, with the stock rising from its IPO price of 46p to 380p today. In other words, if you had invested just £1,000 in the IPO less than five years ago, your stake would be worth over £8,000 now. That’s the kind of prolific return I was talking about.

Quixant designs and manufactures advanced hardware and software solutions for the global gaming industry. Both revenues and profits have exploded higher in recent years, and this morning’s full-year FY2017 results revealed that the company has strong momentum at present.

Indeed, for the year ended 31 December, revenue climbed 21% to $109.2m, with pre-tax profit rising 29% to $15m. Adjusted fully diluted earnings per share surged 38% to 22.9 cents. CEO Jon Jayal commented: “We have started 2018 with robust trading performance and are well positioned to deliver full-year growth ahead of our previous expectations. The new prospects we are working on give us confidence in our longer-term growth prospects.”

After trading above 450p in January, the shares have pulled back a tad recently, although they are up strongly today. At the current price of 405p, the forward-looking P/E ratio is a reasonable 22.8. As such, I believe now could be a good time to consider the stock for your ISA.

Restore

Another small-cap stock that has delivered stunning shareholder returns is Restore (LSE: RST). Over the last five years, the shares have flown from 120p to 500p, turning £1,000 into £4,200.

Restore specialises in document storage, document shredding and workplace relocation. This is obviously not the most exciting business model in the world, yet it appears to be a profitable one for the £570m market cap company.

Like Quixant, revenue and profits have trended upwards over the last few years, and full-year results released last week showed further progress with revenue and earnings per share climbing 36% (7% organic) and 25% respectively. The group hiked its dividend by an impressive 25%.

I’ve had my eye on this company for a while as it’s a favourite of fund manager Mark Slater – one of the top small-cap stock pickers in the UK. The shares have pulled back in recent months, and as a result, with the forward P/E at just 18.4, I think now could be a good time to get involved.

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The plastic packaging maker has been able to achieve such impressive returns for investors as the business is highly profitable and cash generative. Management has been able to successfully reinvest that cash in acquisitions to help improve growth further. The largest of these deals was the recent $640m acquisition of US-based plastic food packaging manufacturer Letica Group, announced in February, which was at the time the sixth deal in five months. 

Growth through acquisitions 

These deals have paid off handsomely. Today, the group announced that during the six months to the end of September, revenue grew 53% year-on-year to £1.9bn, reflecting the contribution from acquisitions, and adjusted EBITDA rose 49%. Free cash flow was up 45% to £172m, from £118m the year before, giving management room to hike the interim payout by 28%. 

After a busy start to the year, RPC is now focused on optimising its cost structure, paying down debt and integrating existing acquisitions. According to management, there will be no further deals this year. 

Still, RPC does not need to buy to grow. Healthy cash generation gives the group plenty of scope to reinvest in the business and grow organically (management is also using cash to buy back stock). 

City analysts have pencilled in earnings per share growth of 11% for the fiscal year ending 31 March 2018, implying that the shares are trading at an estimated forward P/E of 13.4. I believe that this lowly valuation undervalues RPC and the group’s prospects considering the firm’s historical growth rate. The shares also support a dividend yield of 2.9%, and RPC has a 26-year record of increasing its payout to investors. 

Doubling profits 

Another growth stock I believe you might regret not buying is Quixant (LSE: QXT). 

Quixant is an exciting business. The firm manufactures specialist computer systems, which is proving to be highly lucrative. Earnings per share jumped 44% last year, and are on track to grow 36% this year, thanks to rising demand. 

In fact looking at the firm’s first-half results, I believe that the City’s estimate for growth of 36% for 2017 might be conservative. For the six months to 30 June, group revenue rose 38%, while EBITDA and pre-tax profit lept 74% and 98%, respectively. Management has cautioned that these strong growth numbers might not be repeated in the second half as H1 demand was “out of the ordinary” and such buoyant trading is unlikely to be repeated. Still, these numbers put the group in a great position to be able to hit full-year targets. 

The one downside with Quixant is that the shares are quite expensive. At the time of writing the stock is trading at a forward P/E of 29.9, although when you factor in the projected earnings growth for this year, the shares seem cheap, trading at a PEG ratio of 0.8.

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The Sage Group

FTSE 100-listed Sage (LSE: SGE) provides integrated accounting, payroll and payments solutions to businesses of all shapes and sizes around the world. The stock has been an excellent performer in the recent past. This year, the share price is up 20%. Over a three-year investment horizon, the stock has almost doubled.

The group released final FY2017 results this morning, and stated that its transformation programme, which began in June 2015, is now complete. The payroll specialist recorded organic revenue growth of 6.6% for the year, and enjoyed a 10.3% rise in organic operating profit. It stated that 78% of its revenue now comes from recurring sources. Adjusted earnings per share for the year rose 7.4% to 33.1p, significantly beating analysts’ estimates of 29.8p. The dividend was lifted by a healthy 9% to 15.4p per share.

Do the shares still offer value after such a strong run? At the current share price of 784p, Sage trades on a trailing P/E ratio of 23.7. The dividend yield is just under 2%. While those metrics perhaps look a little expensive, I feel that the company has momentum at present. Indeed, Chief Executive Stephen Kelly today commented: “We now have the leadership, organisational alignment, brand and comprehensive suite of cloud solutions, to accelerate momentum in our markets.” Analysts expect further revenue and earnings growth in coming years and the upwards trend of the chart looks promising. As a result, I believe there could be further gains to come from Sage.

Quixant

Turning to the small-cap area of the market, £283m market cap Quixant (LSE: QXT) has been another wealth-generating machine for tech investors over the last few years. The group designs and manufactures advanced hardware and software solutions for the global gaming industry. The stock is only up 21% this year, but since listing on the AIM market in 2013 at a price of 46p, investors have been rewarded with a spectacular return of over 800%. Can Quixant continue to make its shareholders wealthy? I believe so.

It appears to have strong momentum right now. Last year, revenue rose 116% and earnings per share jumped 47%. This year, City analysts expect top-line growth of 18% and an earnings rise of 20%. Half-year results released in September were excellent, with management stating: “The demand for our gaming platforms and monitors remains strong and we are confident in achieving market expectations for the full year.”

The stock currently trades on a P/E ratio of 28, which is clearly high, yet in my opinion, not outrageously high. That level of valuation suggests to me that investors acknowledge the exciting growth story, yet have not got carried away. For long-term investors, I believe there could be further gains to come. Broker Finncap recently lifted its price target to 500p.

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Game on

£300m cap, Cambridge-based business Quixant (LSE: QXT) has been a great performer over the last year with shares in the computing platform provider soaring 63%. A quick glance at September’s interim numbers gives some indication of why the stock has become so popular.

In the six months to the end of June, group revenue rose 38% to just under $57m, with roughly two-thirds of this coming from Quixant’s Gaming division. Even more impressive is the fact that the remaining £19.1m came from Densitron — the electronic screen maker only acquired by the former in 2015.

Although pre-tax profit pretty much doubled to $8.7m from the $4.4m achieved over the first half of 2016, management — rather sensibly — isn’t getting too carried away. While remaining confident on trading for the rest of the 2017 and beyond, Chief Operating Officer Jon Jayal suggested that recent strong demand for its gaming platforms was “out of the ordinary” and unlikely to continue for the full year. In a market where companies frequently over-promise and under-perform, this kind of transparency is really rather refreshing.

At 30 times forecast earnings, Quixant is most definitely not a cheap stock to acquire. Nevertheless, recent results combined with the company’s sound financial position ($1.7m in net cash, comparing favourably to the $100,000 debt on its books as it entered 2017) and consistently high returns on capital suggest it might just be worth paying out for. Or at least adding to watchlists while we await a (somewhat inevitable) pullback in the general market.

In demand

Like those already owning Quixant, holders of small-cap recruitment specialist Harvey Nash (LSE: HVN) have also enjoyed a more-than-decent 2017 so far. Priced at 63p each in January, shares in the £65m cap have since climbed 42% to just under 90p. With 28% and 22% EPS growth expected over the next two years as demand for skilled technicians continues to rise, there could be plenty of upside left to come.

Last week’s interim results for the six months to the end of July revealed a 12.6% jump in revenue and 16.8% increase in pre-tax profit despite a “challenging UK market,” according to CEO Albert Ellis. Record revenue and profits were reported from operations in the Benelux countries with improved trading also seen in the Nordics and Asia Pacific regions.

A transformation plan — implemented during the reporting period and designed to streamline the business, reduce overheads and sort out underperforming offices — was “on track” according to the company. It’s expected to deliver savings of £1.1m this year followed by a further £2.2m in 2018/19. To further support growth, the firm also moved to AIM from the main market after deeming the former to be more appropriate for its scale and acquisition strategy.

Trading at just 8 times earnings for the current year, shares in Harvey Nash look a steal at the current time — even more so when it’s considered that the stock comes with a forecast 4.8% yield, easily covered by profits. While it’s worth keeping an eye on the company’s debt burden, I remain bullish on its prospects for now.

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Quixant

Headquartered in Cambridge, Quixant (LSE: QXT) designs and manufactures advanced hardware and software solutions for the global gaming industry. The company generated sales of $90m last year, and currently has a market capitalisation of just £288m.

Since listing on the AIM market in 2013 at an IPO price of 46p per share, the shares have delivered an incredible return of over 800%, and now trade at around 420p. Is it too late to buy into the growth story? No, in my view.

Interim results released this morning show that Quixant still has considerable momentum. Indeed, for the six months to June 30, group revenue surged 38% higher to $56.9m, and group EBITDA increased 74% to $10.1m. Fully diluted earnings per share for the half year came in at 11.05 cents.

The company announced back on July 24 that trading had been stronger than expected, and COO Jon Jayal this morning advised that he did not expect that level of trading to continue for the full year. He did, however, say: “We are clearly well placed to achieve market expectations for the full year. We therefore look forward to the remainder of the year and beyond with confidence.”

City analysts expect full-year earnings of 20 cents per share this time, which at the current share price and exchange rate, places the stock on a forward P/E ratio of 28.6. That’s a premium valuation, no doubt, but looks to be warranted in my view, given the company’s track record and growth prospects.

Clipper Logistics

Another company that has only been public for a few years is Clipper Logistics (LSE: CLG), which floated back in 2014 at an IPO price of 100p. Today, the shares trade just under 400p, a gain of nearly 300%.

Clipper sees itself as a “new breed” of logistics company, suited to the rapidly changing retail environment. The company employs over 3,900 people, and clients include John Lewis, Harvey Nichols, ASOS and New Look. Essentially a play on the shift to online shopping, Clipper should benefit as consumers move away from the high street and make more online purchases that require delivery.

The logistics specialist generated sales of £340m last year, up from £290m the year before, and earnings per share for the year rose an impressive 20.5% to 12.5p. That growth facilitated a dividend hike of 20% to 7.2p per share.

City analysts have pencilled in top-line growth of 17% this year, and a 30% rise in earnings per share to 16.1p. If the company can deliver on those estimates, the forward P/E ratio of 24.6 doesn’t look that unreasonable in my opinion. 

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For 2017 City analysts are expecting the company to report a pre-tax profit of £12.6m on revenues of £81.7m. For 2016 it reported a pre-tax profit of £11.7m on revenues of £90.4m so profits are growing steadily. Earnings per share, however, are set to rocket higher by 34% this year, following growth of 44% for 2016. Since 2013 earnings per share have risen 180%. 

Lucrative returns 

As Quixant has grown, shareholders have reaped the benefits. Over the past five years, shares in the company have gained 370% significantly outpacing the wider market. 

Quixant is an interesting business. The company is a leading provider of specialised computing platforms and monitors for gaming and slot machine applications. Management is extremely optimistic about the firm’s outlook as the market for gaming continues to expand and the company leverages its existing position in the industry to grow sales and margins. City analysts are similarly excited with earnings growth of 18% pencilled-in for 2018 following 2017’s growth surge. 

Attractive valuation 

Growth shares such as Quixant tend to trade at a high valuation and the gaming company is no different. The shares currently trade at a forward P/E of 24.2 and only yield 0.7%. Nevertheless, when you consider the firm’s projected and historic growth, it looks as if it is worth paying a premium to get your hands on the shares. 

Growing market 

McCarthy & Stone (LSE: MCS) is the UK’s leading retirement housebuilder and is well positioned to grow rapidly in the years ahead. The UK’s ageing population presents a huge challenge for homebuilders. There’s a structural shortage of suitable housing options for older people and this group of customers tends to require a more specialised offering than first-time buyers.

McCarthy has a virtual monopoly over this market being the only nationally recognised brand. This monopoly puts the firm in a prime position to continue its growth and at the time of writing, shares in the group offer exposure to this growth at a knock-down price. 

City analysts are expecting McCarthy to report earnings per share of 15.4p for the fiscal year ending 31 August, up 11% year-on-year. Further growth is expected for the following fiscal year. For the year ending 31 August 2018, the City is projecting earnings growth of 22%. Based on these estimates, shares in the company are trading at a forward P/E of 10.7 falling to 8.3 for fiscal 2018. 

Considering the company’s growth rate, as well as the size of the market McCarthy has available to it, this valuation seems to seriously undervalue the group and its prospects. As well as the depressed valuation, the shares also support a dividend yield of 3.1% and the payout is expected to grow by around a fifth next year. 

Overall, McCarthy looks to be a interesting undervalued opportunity. 

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Gambling success

What do you think when you see a share that has five-bagged over the past five years? I’m usually torn between thinking it might have a lot further to go and wondering whether I’m too late.

Quixant (LSE: QXT) shares are up by around that amount, to 380p, including a 4% rise on the day 2016 results were delivered. The firm describes itself as “a leading provider of specialised computing platforms and monitors for gaming and slot machine applications,” and that’s clearly big business right now. 

Its gaming division enjoyed a 45% rise in revenue to $53m during the year, with adjusted pre-tax profit up 23% to $11.1m.

But Quixant also has its finger in another pie after the acquisition of Densitron in November 2015, and that division also reported good things with revenue at $37.4m and adjusted pre-tax profit at $2.7m in its first full year.

Adjusted EPS gained 47% to 16.6 cents, and the dividend was lifted by a third to 2p per share. Yields are under 1% at the moment, but the company has a progressive dividend policy and cover by earnings is very strong.

The shares are on a forward P/E of nearly 27, which might look a bit high — and with EPS growth expected to drop to 25%.

I also find myself wondering about the gaming technology business — are we looking at a first mover in the latest growth stock fad and does disappointment lie ahead? Or are we really in for years of steady growth and does Quixant have sufficient competitive advantage to stay ahead of potential rivals?

But saying that, I do like Quixant’s support from its Densitron division as backup, and I’m cautiously optimistic about the next five years.

Tempting growth

Shares in Cello Group (LSE: CLL) haven’t had quite the same rocket ride, but a 176% hike in five years isn’t too shabby — and on top of that, we’ve seen dividend yields of around 3% per year over the past few years.

The pharmaceutical and consumer strategic marketing group has reported a 5.4% rise in revenue for the year to December 2016. Like-for-like gross profit was up 5.9%, though headline pre-tax profit and earnings per share were flat and net debt rose slightly to £5.1m.

But the firm was confident enough to hike its dividend by 18.9% to 3.4p, as chief executive Mark Scott said Cello is “now in a strong position to accelerate its global growth, with a particular focus on the US market.” He spoke of the company’s “Pulsar social media product continuing to grow strongly, as well as increasingly supporting the digital communications capability of Cello Health.“

Analysts have another flat year pencilled-in for 2017, but they see EPS starting to grow again by 2018. I see the firm’s two main directions — pharmaceutical sector services and web-based marketing services — as having great long-term potential, especially if the US market really can be cracked.

We’re looking at a 2018 P/E ratio of 13, which I think looks cheap if the acceleration of growth that Mr Scott suggests does come about — and I’m not seeing any reason to doubt his optimism right now. In another five years we could be looking back at 2017 as a great time to have bought Cello shares.

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