Six small in­come stocks that yield up to 7pc

The Daily Telegraph - Your Money - - YOUR MONEY -

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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