Yields of 4% or higher are usually associated with large, mature FTSE 100 businesses such as Royal Dutch Shell or GlaxoSmithKline. However, unbeknown to many investors, there are plenty of smaller companies that pay very generous dividends to their shareholders.
Take a look at these two dividend stocks. Both have turned into cash cows for investors.
£455m market cap SThree(LSE: STHR) is a leading international staffing business that provides permanent and contract specialist staff to a diverse base of over 9,000 clients. The group is a major player in the information and communications technology (ICT) sector but also has exposure to the financial services, energy, engineering and life sciences sectors.
For a small company that is exposed to the cyclical nature of employment, its dividend track record is fairly impressive. Since paying a maiden dividend of 7.2p per share for FY2006, the payout has grown by 94% to 14p per share, a yield of 4% at the current share price. Dividend coverage was solid last year, with earnings covering the dividend 1.8 times, and it's worth noting that the company has never cut its payout. That's a fantastic achievement given that global recruitment hasn't always been strong over the last decade.
My only criticism of the company's capital allocation is that it has now paid seven consecutive dividends of 14p per share. Ideally, I'd like to see more consistent increases. With inflation creeping up, 14p today has less purchasing power than 14p seven years ago.
A trading update released this morning revealed that the firm has solid momentum at present and that global hiring conditions are buoyant. For the three months to the end of February, gross profit rose 8% year-on-year. While hiring was understandably poor in the UK (-3%), it was strong across Continental Europe (+15%), and the Asia Pacific and Middle East regions (+15). Chief Executive Gary Elden commented that the group has "made an encouraging start to the year" and that there are "good growth opportunities" available in 2018.
City analysts expect full-year sales growth of 9% and 8% for 2018 and 2019 respectively, with earnings expected to climb higher too. While another dividend payout of 14p per share is pencilled in for 2018, analysts expect growth to 14.8p per share in 2019. On a forward P/E of just 12.9, SThree certainly looks to have investment potential.
Another small-cap stock that packs a mighty dividend punch is £67m market cap Harvey Nash(LSE: HVN). Like SThree, the company is a staffing specialist, with operations both here in the UK, and internationally. The firm specialises in technology and digital recruitment, so is well placed to ride the current tech boom.
For FY2017, HVN paid its shareholders 4.1p per share, which at the current share price, is a healthy yield of 4.7%. Coverage was solid at 2.2 times. Dividend growth over the last five years has been excellent, with the payout increasing from 2.7p to 4.1p per share, an increase of over 50%.
Looking ahead, City analysts expect the dividend payout to keep rising, with distributions of 4.3p and 4.6p per share expected for FY2018 and FY2019 respectively. Trading on a forward P/E of just 6.9, this is a growth and income stock that definitely warrants a closer look.
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Edward Sheldon owns shares in Royal Dutch Shell and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Royal Dutch Shell B. 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.