Inflation can eat into the value of your income and savings. To ensure that your stock market wealth stays ahead of rising prices, it can be helpful to focus on companies whose dividends are rising ahead of inflation.
UK inflation is currently about 3%. Today I'm looking at two small-cap dividend stocks whose payouts have risen by at least double this amount.
A mixed picture
International recruitment firm Empresaria Group (LSE: EMR) issued its 2017 results this morning. Sales rose by 32% to £357.1m last year, but much of this reflected pass-through wages of temporary workers. A more meaningful measure is net fee income, which rose by 18% to £69.4m.
According to the firm, net fee income has now risen for 18 consecutive quarters. Profits have also risen steadily in recent years. It said today that its adjusted pre-tax profit rose by 20% to £11m last year. However, the recruiter's statutory pre-tax profit only rose by 3% to £8.1m.
As investors, I believe we need to understand the difference between the adjusted and statutory figures. But having taken a closer look, I'm satisfied that the adjusting items are either genuine exceptional costs or non-cash charges that can safely be ignored.
15% dividend growth
The good news for shareholders is that the firm's dividend has been increased by 15% to 1.32p per share for 2017. Although this payout only gives a yield of 1.5%, the Crawley-based firm's dividend has risen by an average of 26% per year since 2011.
Today's dividend increase was ahead of consensus forecasts, so expectations for the year might also be increased. As things stand, the shares trade on a 2018 forecast P/E of 7.6 with a prospective yield of at least 1.5%. Although low P/E ratings are the norm in the recruitment sector, I believe this stock might offer reasonable value at this level.
A better choice?
Shares of Midwich Group (LSE: MIDW)have risen by 135% since the group's flotation in 2016. This company is a distributor of audio-visual equipment and document management solutions to trade customers.
The group has around 13,000 direct customers as well as relationships with 330 vendors, who resell the products to their own customers. About 60% of sales come from the UK, with the rest coming from continental Europe and Australasia.
A year of rapid growth
Yesterday's full-year results show that 2017 was another strong year of growth. Sales rose by 27.5% to £471.9m, while adjusted pre-tax profit climbed 35.7% to £24.3m.
The dividend was increased by 36% on a like-for-like basis to 13.8p, giving the stock a yield of 2.5%.
Companies with rapid dividend growth tend to have lower yields than those with slow-growing payouts. Over time, I expect Midwich to follow this pattern too, offering a higher yield with lower growth.
2018 is expected to be another year of strong growth, with analysts pencilling in earnings per share growth of almost 50% and dividend growth of around 10%.
The stock trades on a forecast P/E of 21, so a lot of growth is already in the price. But if you're keen on this sector and believe Midwich can continue to expand, these shares could be a good buy at current levels.
The best dividend growth stocks?
Midwich appears to have good income potential. But it's a relatively new arrival on the stock market. If you want to build an inflation-beating income portfolio for the long term, it might make sense to focus on companies with longer track records.
To help you get started, we've selected five stocks which we believe are the best dividend-growth shares in the FTSE 100.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.