When I'm looking for dividend stocks to invest in, I prefer to look beyond the popular large-cap names. With the limited analyst coverage in the small-cap arena, there are some hidden gems which may offer a potent combination of both superior dividend growth and better capital appreciation opportunities.
In this space, I reckon Communisis(LSE: CMS), the small-cap marketing company, could be one of the best dividend stocks to buy right now.
Amid a changing market landscape, the company has successfully transformed itself from an old-fashioned printing business into an integrated marketing specialist with fast-growing digital capabilities.
It has put itself in a strong position to take advantage of the shift from print towards digital services and has continued to win new contracts, which has been translating into healthy earnings growth and exciting further growth prospects.
The company has also recently announced an ambitious three-year Value Enhancement Programme to deliver 5%-10% annualised adjusted EPS growth through to 2020, via its three key strategic themes: Digital First, Global Reach and Empowered Organisation.
Despite its attractive outlook on growth, the valuation multiples for the company seem undemanding. As City analysts are expecting underlying earnings growth of 6% this year, its shares trade at just 9.5 times its expected earnings. And looking further ahead, analysts have pencilled in a further 7% growth in its bottom line, which would reduce its 2019 forecast P/E to a mere 8.8 times.
Dividends per share are also forecast to rise impressively, from 2.66p last year, to 2.84p and 3.02p for 2018 and 2019, respectively. This means its prospective yield is set to rise from 4.1% currently, to 4.4% and 4.7%, respectively. Moreover, its dividend safety is attractive, with dividend cover forecast to be around 2.4 times over the next two years.
Free cash flow
Elsewhere, Photo-Me International(LSE: PHTM), a small cap company which operates a wide range of instant service equipment, offers prospective investors a dividend yield of 4.9% that is supported by steady earnings growth.
With a forward P/E of 17.8, valuations seem pricey for the company. But this is offset by its strong free cash flow generation, which allows it to return a relatively high proportion of its earnings -- more than 70% in the last financial year -- to shareholders via dividends.
As a leading global operator of self-service photobooths, Photo-Me benefits from robust geographical diversification which shields it from a slowdown in any one particular market. As such, despite a slowdown in the UK and Japan, revenue growth keeps chugging along steadily as rises in continental Europe and Ireland offset the slack.
The company is also doing well in its expanding self-service laundry business. Photo-Me added more than 700 self-service laundry units in the first half of the year, which should help the company deliver continued earnings hikes going forward.
City analysts are sanguine. Out of three brokers covering the stock, all three rate it as either a 'strong buy' or a 'buy'.
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Jack Tang has no position in any 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.