High yielding AIM shares for income investors

Wednesday, Sep 05 2018 by
High yielding AIM shares for income investors

Dividends paid by companies quoted on the Alternative Investment Market (AIM) are set to pass the £1 billion mark this year - and that’s promising news for investors looking for some all-cap income diversification.

The milestone comes as payout growth from AIM stocks tripled between 2012 and 2018. Dividends grew by an average of 15 percent every year once you adjust for new issues and delistings.

Despite the growth from AIM stocks, dividends in the Main Market still make up the vast bulk of overall payouts, although growth is understandably lower at 4.9 percent. In fact, overall dividends from equities are forecast to come in at £97.8 billion in 2018, but there is a huge dependency on the top 15 company payers. Last year, the top 15 accounted for three fifths of all UK dividends. The top five accounted for nearly two-fifths.

A maturing market

Across nearly 1,000 quoted companies, the yield on AIM stands at 1.2 percent. That’s some way off the 3.9 percent average on the Main Market. But bear in mind that only about a third of AIM firms pay a dividend (compared to four-fifths on the Main Market). When you strip out AIM firms that don’t make payouts, the yield rises to 2.1 percent.

Analysis by Link Asset Services suggests the improving picture for AIM dividends is down to both the increasing maturity of quoted firms and the larger size of new companies coming to the market. Over the past five years, the market cap of the average AIM IPO was £20 million, which was up from £12 million in the five years previous.

Interestingly, AIM dividends also offer less concentration and broader sector diversification than the Main Market. In particular, they have a greater focus on industrials and IT, and less dependence on oil companies.

Screening for AIM dividends

This year it’s expected that the total dividend payout from AIM firms will reach £1.16bn. But how can you begin filtering the market for the strongest, safest yields? This week, we’ve taken a look at the highest rolling yields available on the market, adding in a few safety nets along the way.

To start with, the search focuses on companies whose dividend payments are covered by earnings (dividend cover) by at least 1.2 times. I wanted to see at least two years of dividend growth from…

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6 Comments on this Article show/hide all

Sk8dad 10th Sep '18 1 of 6

Plus500 (LON:PLUS) has been taking a lot of my attention recently - it has a very high ROCE, and very high FCF, but low Price to FCF, so it suggests you're not overpaying for that cash generation. I also ran a DCF calculation on this and found that I could only match the current SP if I assumed zero growth from here on in. Its the only UK stock with a ROCE above 100% and a Price to FCF less than 10. It has recently been hit in terms of share price from a few events coinciding at the same time, and we're yet to know if they're related or not - founders reducing their stake, Playtech group selling their entire holding (supposedly to fund some other M&A or debt repayment if I recall), and Plus500 (LON:PLUS) gave some caution in their August interims - exceptional Q1 trading, but not likely to be repeated due to new ESMA rules coming into force, and the reduction in crypto trading. Both these latter items have probably been overplayed in the resulting SP downgrade, but coupled with the founder and Playtech sell-offs, it's been enough to unnerve the market. That aside, the accounts for this company look fantastic, it gets a 99 rating from Stocko, passes 9 Guru screens, and matches my high ROCE, low Price to FCF ratio better than any other UK stock. I've accumulated and trust the numbers, hoping these recent events are not going to surprise me at the end of Sept when we're due a trading update, or in Feb when the annuals are posted. Would welcome any views from fellow Stocko subscribers.

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Sk8dad 10th Sep '18 2 of 6

I should add that dividend cover for Plus500 (LON:PLUS) has been consistent at around 1.67x, sufficient for me to be comfortable so long as its not reducing over time. If you add the TTM (inc exceptionally strong 2018 interims) this dividend cover reduces to an estimated 4x, showing that unless their is a bump in the road, either the Co will generate a significant amount of FCF to the firm (debt repayment, share buyback etc) or will be in a position to increase the dividend paid to shareholders. It's an interesting and exciting, if slightly unnerving moment for me as a Plus500 (LON:PLUS) shareholder.

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Peteraj100 12th Sep '18 3 of 6

Very important article for me, largely because of my interest in AIM stocks to minimize IHT exposure.
Ben, it is possible for you to screen for those stocks that qualify for Business Relief (BR)) - used to be BPR?

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investorschampion 12th Sep '18 4 of 6

Worth noting that PLUS has moved to Main Market - woe betide those investing for IHT planning purposes who didn't sell prior to the move as they may not be able to benefit from the originally holding period in terms of replacement relief.

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investorschampion 12th Sep '18 5 of 6

In reply to post #398249

You can use the Investor's Champion AIMsearch tool to check for BR qualification https://aimsearch.investorschampion.com/

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OldChalky 12th Sep '18 6 of 6

One week after this article Epwin posted a 12.5% rise in share price today. Shortly after I bought Epwin earlier in the year their price tanked on the news that a competitor had bought one of their biggest customers. ‘More fool them’ was my reaction as said competitors are now having to run a retail business alongside a manufacturing one. Epwin’s board reaction was to pledge a minimum 2x div cover from now on and a reorganisation of manufacturing sites which confirmed my feeling that this was a company worth sticking with. Glad I did!

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About Ben Hobson

Ben Hobson

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