Three top small-caps for bumper dividends
Small-cap Somero(LSE: SOM) offers a 7.1% yield this year, courtesy of a special dividend. Its concrete-laying machines create the best surfaces in the business. This exceptional quality has attracted a star-studded client list, including Walmart and Tesco, who include Somero products in planning specs to ensure the floors in warehouses are flat and strong.
The boom in North American construction and online retail over the last five years or so has propelled operating profit from $1.4m in 2012 to $21.2m in the same period.
Shares in the company dipped slightly earlier this week after the company reported a flat Q1 in North America. This market is all-important to the company and accounted for 71% of its revenues last year, but the sector looks healthy enough.
Somero trades on a PE of 15 and yields over 7% this year, returning to a more manageable 4% next year. With a $12.7m warchest and a base dividend covered four times by last year's free cash flow, Somero surely looks attractive to income investors.
Cash-flow-positive in crisis
Embattled trade show operator ITE Group(LSE: ITE) yields 2.9%. The company primarily specialises in oil trade shows in Russia and surrounding countries. The shares have slipped 32% in three years as the deteriorating oil price and a weak ruble put pressure on events in its major markets.
However, the trade show business has wonderful economics that have allowed ITE to not only maintain a dividend, but remain cash-flow-positive in a time of crisis. Because the company tends to operate the number one or two shows in a given industry, a certain level of attendance is all but assured.
The big players simply must attend these events and usually book months in advance, allowing ITE to negotiate on all manner of costs including floor space booked for the event ahead of time.
The company has diversified away from oil in recent years but new CEO Mark Shashoua has put the brakes on any further deals for the time being to allow the balance sheet to strengthen. If conditions improve, cash-flow could explode. The dividend would likely follow. If it recovered to its past high of 7.4p, investors buying-in today could receive a double-digit yield.
Heavy Investment About To Pay Off?
Devro(LSE:DVO) manufactures sausage casings and the demand for this cheap source of protein is growing globally. Traditionally, casings are made from pig or sheep intestines, but this method can't keep up with rampaging demand. Collagen, a far more readily available product, is a great replacement and is easy for manufacturers to work with.
The company has struggled in recent years, but new factories in China and the US are operational and have significantly increased capacity. Trading at 14.5 times operating cash flow - and pumping most of the cash generated back into capital expenditure - the shares don't look incredibly cheap. However, the story at Devro is more future-focused. The company has invested millions in recent years resulting in significant cost cuts and increased capacity. Coupled with surging demand from China, I believe Devro's 4.0% yield could grow 50% by 2019.
If you're interested in another small-cap income stock, our top analyst has been investigating a small yet efficient operation with a £68m market cap, trading on a PE of 7.5, paying a dividend covered five times by free-cash-flow.
The yield is only 1.5%, but the business has roaring momentum and plenty of room for the income to grow. Click here for the free report.
Zach Coffell owns shares in ITE Group and Somero Enterprises, Inc.
The Motley Fool UK owns shares of and has recommended Devro. The Motley Fool UK has recommended ITE Group and Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
