Under the Radar Report have three Small Cap dividend stocks that our analysts agree represent good value. The average dividend is well over 5%, not including franking credits. Access more dividend stocks and sign up for a free trial today.
Our Small Cap Dividend Portfolio performance
Our June 2020 Small Cap Dividend Portfolio returned almost double that of the S&P/ASX All Ordinaries Index. More to the point, overall our Small Cap Dividend Portfolios over the past 4.5 years have solidly outperformed the index, generating annual double digit returns, versus negative returns from the All Ords. The difference with Small Caps is that they provide your ASX share portfolio with all important growth potential.
This strong outperformance, highlights that dividends are a good indication of business health. In the case of Small Caps, they are not the reason to invest, but are one indicator of a strong balance sheet.
Why are dividends more important than ever?
Make no mistake, in the current environment, dividends have never been more important. You cannot find a term deposit that has a rate above 1.2% where your money is also locked up for a period. You can’t get 1% from an Australian Government Bond. Even if you do, you’re taking price risk. If interest rates go up, the value of your bonds goes down. In Australia and the rest of the developed economies, interest rates are declining to close to zero at all points of the yield curve, indicating how low expectations are for economic growth. But you’ve got to get income somehow. If not, you live off your capital, which is fine if it’s growing. If it’s not, then you need yield. Our Dividend Portfolios have delivered strong cash returns as well as capital appreciation. What more do you want from an investment?
Small Cap dividend stock Austal (ASB)
Austal is a global designer and builder of ships. Its main ship yards are in WA and in the US. It designs and manufactures defence and commercial ships. It specialises in twin hulled aluminium ships and ferries.
Austal currently builds two vessel types for the US Navy, Expeditionary Fast Transports (EFTs), and Littoral Combat Ships (LCS). It is more than half way through multiple ship orders for both types, and has been awarded further vessel contracts to extend the initial orders. It is building 21 vessels for the Australian government's $900m 30 year Pacific Patrol Boat replacement at its shipyard in Henderson WA and will be servicing them through its facility in Cairns.
Austal’s current forecast dividend yield is relatively low but growth is underpinned because the company can easily meet future expenditure: expansion into steel shipbuilding in the US, a new dry dock facility in San Diego and a possible partnered acquisition of a Philippine shipyard. The company’s $4.3bn order book runs into FY24.
Small Cap dividend stock Infomedia (IFM)
This Small Cap dividend stock is one of three leading publishers of car parts and prices, servicing dealer networks around the world. It is mission critical for the auto-dealers of this world to have its electronic parts catalogue (EPC) on hand. For any one automaker there are something like 300,000 parts in its inventory, but when a particular brake pad is needed, say for a 1990 Ford XF Falcon panel van, an EPC must be used to find it. The company has delivered positive earnings momentum because of the reliability of its earnings. There is foreign exchange risk with 80% of revenues coming offshore.
This dividend stock's subscription business model provides annuity income from which dividends flow. The company is in a healthy financial position, having raised $84m in cash in the middle of the lockdown. The dividend yield may be relatively low but the company is a consistent performer.
Small Cap dividend stock Evolution Mining (EVN)
This dividend stock has diversified gold mining operations in Australia, operating six domestic gold mines, and is the country's second largest producer of the yellow metal. Evolution has the second lowest costs of the top ten gold producers globally.
FY19 gold production was 753,000 ounces, with about the same expected for FY20, within a 5% range.
Evolution has recently made its first overseas investment, in Canada, where it is also investing up to $150m in remediating and expanding operations at the Red Lake mining complex.
The gold producer stands out among its peers for its cash flow, which translates not only to growth in production, but also to dividends. The free cash flow per ounce is A$726, almost double the average. The company has debt but this gives it more leverage to benefit return on equity. We are also confident because it is a low cost producer.