Small-cap income - How to find dividend growth stocks on AIM
Dividends paid out by companies quoted on the Alternative Investment Market (AIM) rose by nearly a quarter to £633 million in the first half of 2019. At the current run rate, the overall dividend payout from AIM stocks has tripled since 2012.
For investors, the eye-catching appeal of AIM is the possibility of finding high growth stocks that come with attractive tax benefits. But with nearly 900 companies on the market, what do the latest figures really say about AIM dividends, and what should an income investor be looking for?
Dividend data in 2019
According to research by Link Asset Services, the growth in payouts from AIM shares in the first half of 2019 was bolstered by unusually large special dividends. Strip them out though, and the underlying payout still came in at £571 million. That’s 13.9 percent higher than the first half of 2018. A little under half of the increase was derived from new company listings.
Last year, the overall dividend payout from AIM stocks crossed the £1 billion marker for the first time (coming in at £1,116 million) and Link believes 2019 is set for another record full-year total.
In terms of large-paying sectors, the fastest underlying dividend growth in 2019 has come from healthcare, financials, and industrial goods and support companies. Retail, on the other hand, saw payouts fall, largely because Conviviality went bust, while payouts also fell in the building materials & construction sector.
Expectations for the year ahead
Looking ahead, the forecast dividend yield for the whole of AIM currently stands at 1.5 percent. But when you exclude non-dividend paying stocks, the yield rises to 2.5 per cent. As Link points out, that’s only a little way behind the 3.1 percent from the mid-caps on the main market, although some way off the 4.5 percent yield from the FTSE 100. Overall, the payout forecast stands at £1,304 million in 2019, up 16.8 percent in headline terms on what we saw in 2018.
For investors, these dividend expectations are fairly upbeat considering that the main AIM All Share index fell sharply last autumn and has been flat for much of 2019. The lack of a rally in smaller stocks - which we’ve also seen in the FTSE SmallCap index - perhaps reflects the risk-off nature of investors uncertain about how issues like Brexit might affect smaller firms.
Arguably, an economic slowdown could hit the dividend paying capabilities of smaller AIM companies. But if the outcome ends up being positive (or less worse than the market is perhaps pricing in) there could be an argument to say AIM income stocks are cheap. Only time will tell.
In the meantime, here’s a list of stocks currently passing some of the classic dividend checks used by income hunters. The rules here looks for
A forward yield of more than 3.0 percent
Dividend cover of more than 1.2x
Positive forecast dividend growth
Positive relative price strength (6 months)
A market cap of more than £20 million
The list is sorted by dividend growth streak (number of years of dividend growth)
Name | Mkt Cap £ | Forward Yield % | Forecast DPS Growth % | Div Growth Streak | Rel Strength % 6m | Industry Grp |
52.3 | 4.11 | 6.82 | 9 | +11.8 | ||
394.2 | 3.26 | 4.09 | 9 | +10.3 | ||
78.7 | 4.31 | 4.05 | 7 | +8.44 | ||
24.4 | 4.52 | 8.53 | 7 | +13.5 | ||
99.7 | 4.87 | 5.71 | 6 | +28.4 | ||
99.4 | 3.33 | 9.38 | 4 | +24.4 | ||
182.6 | 5.36 | 6.30 | 3 | +11.2 | ||
52.6 | 5.49 | 4.08 | 3 | +9.14 | ||
101.7 | 3.56 | 7.69 | 2 | +30.5 | ||
58.7 | 3.99 | 2.47 | 2 | +6.59 |
As the UK’s market for growth companies, AIM is popular with individual investors but it hasn’t traditionally been a source of ideas for income hunters. Smaller stocks with vulnerable cashflows don’t often appeal to investors looking for solid, dependable companies that are well financed and capable of sustaining their dividends. Yet, the evidence shows that AIM is in fact becoming an increasingly attractive source of payouts.
The yields here range from 3.2 percent at healthcare provider Caretech to 5.5 percent at the investment firm Jarvis Securities. Caretech and Murgitroyd, an IP and trademarking specialist, have the strongest track records, with dividend growth streaks of nine years-plus.
It’s reasonable to say that the big dividend payers of the FTSE 350 will always be the main hunting ground for dividend investors, but AIM could offer some interesting alternative options. As a market that is highly sensitive to sentiment, it may offer the chance to buy income on the cheap when uncertainty reigns.
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4 comments
I was recently looking at Murgitroyd (LON:MUR).
The long term track record isn't that good, see below.
Note: To compile this, it was necessary to copy & paste data from the Stockopedia, then download the oldest pdf stock report and faff around for a while to import that to Excel & line it all up. More recently I've found an alternative source that can download finance data all the way back to 2002 with one click, but best not to mention that here.
Turnover has gone up nicely, but margins have gone down notably since 2013. As far as I can tell, the management say this is is due to increased competition and a strategy to grow, even if that means going after lower growth margin.
In the absence of any suggestion or evidence that they might increase margins again, I decided not to buy.
For quite some time, I have owned shares in Begbies Traynor (LON:BEG) from the list, but they have suffered from a drop off in insolvencies in recent years & it should be a nice counter cyclical stock for when this situation eventually corrects.
I briefly had a starter position in Ramsdens Holdings (LON:RFX), but was scared off by the threat of contactless payments disrupting their travel money business. Just like in the UK, contactless payment is becoming endemic in some EU countries.
Alternative views welcome as always.
Interesting picture there on £MURG jonesj . I'm with you I think the longer term view can often give a very useful perspective. I can see your misgivings re the trends, but the most recent & forecast figures (I had to right click and view the image independently to view the right-most columns.) suggest the margin trend may have been broken. I have no idea of the 'story' at this stage having not looked at them before.
Not on you graphic, but they seem to have a long unbroken run of dividend progression which is always nice to see in a business that has been around for a while.
That might have put paid to any free-time I thought I had carved out for tomorrow ;-)
... jonesj, are you able to share your back to 2002 source? Thanks.
Jeff, many thanks for letting me know the source of your dividend data.
FG