Finding the dividend payers of the future

Professional investor Ken Wotton of the Baronsmead Venture Capital Trusts picks three small-cap stocks that should generate consistent dividend payments.

The wave of Covid-induced dividend cuts is forcing many British investors to re-evaluate their saving strategies. According to stockbroker AJ Bell, total dividend payments for 2020 are on course to be the lowest in six years – £63bn – with cuts estimated at £31.6bn. With £26.5bn – more than 80% – of the cuts coming from FTSE 100 firms, the current crisis has reminded investors of the importance of diversification. Historically, savers have relied on the blue-chip index, but there are plenty of income-generating small caps with more consistent payout policies.

Many investors assume that smaller companies are always more vulnerable to economic difficulties, but we look for companies dominant in niche markets that are relatively insulated from macro dynamics. Investors’ instinctive aversion to smaller companies means they can be neglected and thus offer us an attractive entry point. They are currently trading at a substantial discount to large caps.

A fantastic record of payout increases

Bioventix (Aim: BVXP), for instance, is a research-and-development company focused on producing antibodies for clinical diagnostics and pharmaceutical research. Thanks to its highly cash-generative business model, the £220m market cap company – which has a dividend yield of 2% – has a fantastic record of dividend increases: a 30% compound annual growth rate (CAGR) over five years. This means if you bought the shares on 1 July 2014, more than 80% of your original cost would have been returned in dividends and your capital would have appreciated by 750%. 

Another little-known consistent dividend growth story is Anpario (Aim: ANP), an £85m market-cap natural animal-feed additive producer for global agriculture and aquaculture markets. The company offers a 2.3% dividend yield and has seen 12% dividend-per-share CAGR over the past five years. The dividend cover is well over two times.

Securing new income streams

While hunting down the market-cap spectrum can unearth dividend payers to alleviate the income drought, investors should not stay fixated on current payouts. Now is the time to focus on high-quality, promising businesses with the capacity to grow and pay dividends in the future. 

The Baronsmead venture capital trust portfolios blend earlier-stage unquoted businesses, which provide access to capital growth, with more stable income-generating Aim stocks. This unique approach allows us to identify the dividend payers of the future while maintaining a regular income stream. 

By taking smaller initial stakes in a broad range of early-stage companies we can manage downside risk as we assess the business growth potential. We then focus on the best companies, providing further capital and expertise. If a company scales up and becomes a listed reliable dividend payer, we can also invest in it through our other open-ended equity funds.

Ideagen (Aim: IDEA) is one company we have our eye on. The market-leading provider of governance, risk and compliance software already pays a dividend and, as it matures, will form an increasing proportion of our overall return. This is a stock we invested in originally at 19p in 2013. It now costs 172.5p.

Recommended

Iris Apfel: an inspiration to young fashionistas
People

Iris Apfel: an inspiration to young fashionistas

Iris Apfel made her name as a high-society interior designer before a show at the New York Met turned her into a fashion influencer. At 100 years old,…
19 Sep 2021
Warsaw and Stockholm: the unexpected new threats to the City of London
UK stockmarkets

Warsaw and Stockholm: the unexpected new threats to the City of London

London has seen off challenges from Frankfurt and Paris, but two other booming financial centres are a bigger threat, says Matthew Lynn.
19 Sep 2021
The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
The new social-care levy: an unfair tax that protects the “assetocracy”
National Insurance

The new social-care levy: an unfair tax that protects the “assetocracy”

The government’s regressive social-care levy will make Britain’s tax system even more complex. Root-and-branch reform is long overdue.
18 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021