Three small-cap stocks to buy for income

Each week, a professional investor tells MoneyWeek where he'd put his money. This week: Ed Beal, manager, Dunedin Smaller Companies Investment Trust.

Small companies are somewhat out of favour. Investors often regard them as volatile and overly dependent on the domestic economy. But this is a pity as I expect the right companies to be able to grow their earnings more rapidly than their larger counterparts.

For investors who are interested in income, this can translate into a rate of growth in dividends that also beats bigger companies.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At the same time, a portfolio of smaller companies can provide a more diverse stream of dividends than, say, a large-cap portfolio, which often reflects the biases within the FTSE 100 only 15 sectors contribute approximately 65% of its dividend income.

Many small companies have international operations that are equal in size to, or even larger than, their domestic operations. With all these positive attributes it is surprising that many small caps trade at a discount to larger rivals. Here are three companies that exhibit many of the traits I like.

RPC (LSE: RPC) is a leading producer of plastic packaging. The industry is growing because there is an increasing amount of regulation relating to the use of such packaging.

This is leading to plastic being used in place of heavier materials, such as glass and metal. RPC owns a range of technologies that allow it to benefit from this transition.

Better still, many competitors are unable to produce plastic packaging that will keep food fresh for a sufficient period of time or allow the customer to print complex designs on the material.

RPC recently acquired Danish plastic packaging producer Superfos. This will provide increased scale to their injection-moulding operations. Most of the industry is characterised by large operators who rely on being able to produce very high volumes of uniform products.

RPC's products, on the other hand, are generally customer-specific. This requires a nimbleness that acts as a barrier to larger operators who may want to enter the market. RPC trades on a p/e of 9.5 and yields 3.5%.

Euromoney (LSE: ERM) is a business-to-business publisher that provides specialist financial information. The high-value-added nature of the content is reflected in a 30% operating margin. Euromoney collates and presents data in a format suitable for use by its end customers.

It also provides associated events and conferences. More than 50% of sales are subscriptions and this provides a good level of earnings visibility. The company has built a sizeable business in emerging markets, which now account for over a quarter of sales. The business trades on a p/e of 10.5.

BBA Aviation (LSE: BBA) has a leading position in the operation of flight support stations for private business jets in the US and Europe. This is a recovering market that is expected to deliver above-GDP growth over the medium term. There is scope for further growth through consolidation. The barriers to entry are high as the ability to provide a national network of bases is difficult to replicate.

BBA also has a unique business that provides out of production spares to the aviation industry. It benefits from a flexible cost base, which provides some protection in the event that markets slow again. High levels of cash generation have resulted in a balance sheet that is able to support an attractive and growing dividend while also funding bolt-on acquisitions. BBA trades on a p/e of 10.9 with a 4.5% yield.