Six small income stocks that yield up to 7pc

Ahuge number of retired people rely on dividend-paying stocks, or funds that invest in them, to generate an income in retirement. But a small group of stocks is responsible for an enormous share of total dividend payments in Britain. Together, oil, gas and tobacco firms account for around 30pc of FTSE 100 dividends, making many investors disproportionately reliant on them.

But these giant firms are far from the only place where investors can find a decent income. One alternative source is smaller companies.

A large number of small and medium-sized stocks pay an attractive yield, although they are often found in sectors not normally associated with income.

As a result of their size, these are not stocks you will typically find in the large equity income funds that many savers rely on. Telegraph Money asked a selection of top fund managers for their favourite small and mid-sized income stocks.

Market value: £960m Stobart is an infrastructure business involved in a variety of areas, such as supplying biomass to power plants, operating Southend Airport and running rail engineering services. It also retains a 12.5pc stake in Eddie Stobart Logistics, the trucking firm in which it sold a majority stake in 2014 to invest in its new biomass business. Gervais Williams, co-manager of Miton’s £920m Multi-Cap Income fund, said Stobart was an example of a company with “good and growing dividends”. He added: “While it went into loss for a couple of years while it was investing in the new business, it has continued to pay a dividend as before. Recently, as the cash payback has started to come through from the new business, and following some property sales, it is now in a position to pay more generous dividends.”

Mr Williams said the group was projecting an 18p dividend for the year to February 2018. This would equate to a huge 6.4pc yield, despite recent share price rises.

Market value: £300m Shares in McColls, the convenience store and newsagent brand, have gained around 60pc over the past year but still yield 4pc.

Martin Turner, Mr Williams’ co-manager, said the business had recently expanded, buying 298 stores from the Co-op. “The benefits should materialise over a number of years and transform the prospects for sales growth and profit margins. This could translate into good dividend growth in the future,” he said.

He added that McColls’ 1,300 convenience stores and 350 newsagents put it in a solid strategic position “which bodes well in a sector that is expected to consolidate further”.

Market value: £1.1bn Card Factory, which sells greeting cards and gifts from high street stores, offers a 7.5pc yield once a “regular” special dividend is taken into account, according to Simon Moon, co-manager of the Unicorn UK Income fund. He explained that, unlike competitors such as Clintons or WHSmith, which buy cards from wholesalers, Card Factory has “complete internal control of the design, manufacture, distribution and sale of its cards”. “This gives it a huge price advantage against its competition. Combined with its compelling offering to consumers, this makes it exceptionally attractive,” Mr Moon said. He added that Card Factory was able to fund further stores from its own profits and was also able to pay special dividends consistently thanks to high levels of cash generation.

Market value: £820m This business manufactures and distributes a number of leading brands, including Clover spread and Cathedral City cheese. It sold its “struggling” dairy business in 2015, Mr Moon said, to focus on generating growth from its brands. “It has also made significant progress in targeting high-growth markets such as infant formula and health products for humans and animals,” he added. He said rising milk and cream prices could increase costs in the short term, but Dairy Crest’s scale and facilities relative to its rivals meant it could cope.

The firm has recently finished investing in a Cornwall facility, meaning that cashflow should improve.

“The shares’ price to earnings multiple is just over 15, with a yield of around 4pc. We feel this is an attractive entry point for a market leader with significant advantages and growth prospects,” Mr Moon said.

Plenty of firms outside the FTSE 100 pay good dividends. James Connington asks fund managers for their favourites

Market value: £660m RPS is an international environmental consultancy that advises clients on infrastructure and other developments. It also has a business that focuses on energy developments. Catherine Stanley, lead manager of the F&C Responsible UK Income fund, said RPS was a “classic growth and income stock”.

The energy business has been under pressure because of the depressed oil price, which has led to subdued investment by oil companies, but there is now “recovery potential, with relatively limited downside left”. Additionally, some of its other business areas “are on an improving trend”.

The shares have risen by more than 50pc over the past year but the stock still yields 3.3pc, while the dividend was increased recently. The firm has also appointed a new chief executive, who is not “turning up to do nothing”, and Ms Stanley said there was the potential for RPS to make acquisitions to help growth.

As a result of their size, these are not stocks you will find in large equity funds

Market value: £1bn Wealth manager Brewin Dolphin is a well-established business but has suffered from “lacklustre growth versus its competitors”, Ms Stanley said. However, its assets under management have been growing “encouragingly” and its shares still trade at a discount relative to its competitors, she added, describing Brewin as “a steady dividend grower – a classic, reliable payer”.

The balance sheet appears solid, offering the potential for Brewin either to acquire competitors or be acquired itself. The shares currently yield 3.7pc.

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