2 dividend-paying small caps with market-beating growth potential

Picking small-cap stocks can be a tricky sport, but if you get it right, you can make millions.

Today, I'm taking a look at two small-caps that have both smashed the market over the past few years and look set to continue this record.

Profits surge

Since mid-2014, shares in construction equipment group Somero Enterprises(LSE: SOM) have produced a return of 525% for investors, excluding dividends. This means the stock has beaten the FTSE 250 by a staggering 470% over the same period.

Surging profit is the reason why the company has been able to produce such impressive gains for investors. Since 2012, net profit has jumped a staggering 1,740% from $1m to $18m, a rate of around 80% per annum according to my figures.

Unfortunately, growth is expected to cool this year. Analysts have pencilled in earnings growth of 14% for the year ending 31 December. Still, in my opinion, the shares continue to offer value for investors.

The stock trades at a forward P/E of 14.4 that's excluding cash on the balance sheet of $19m (£14m). Cash generation is one of Somero's best qualities. Despite $14m of dividend payments in 2017, its cash balance only declined $1m for the year, as inflows easily covered shareholder distributions.

Somero's cash balance is worth around 24p per share according to my figures, indicating that the stock is trading at a cash-adjusted P/E of 13.7. The shares currently yield 3.6%.

As the company continues to churn out cash, I believe its growth is only just getting started.

Reach for the stars

Filtration products specialist Porvair(LSE: PRV) has doubled earnings per share in the past six years as it has consolidated its leading position in the global filtration market.

While the company's growth hasn't been as robust as Somero's, I still believe it is a growth stock to watch.

Today, the group reported that it is set to report a profits rise for the six months ended 31 May 2018 "in line with management expectations," although there's no further guidance on the bottom line. City analysts have pencilled in earnings growth for the full-year of 3%, which, in my opinion, seems conservative.

Indeed, today the company reported that underlying revenue growth for the period to the end of May was 13%, that's compared to the City's full-year target of 6%.

Personally, I believe that Porvair could be on track to beat the City's predictions for the year if it continues on its current course. For this reason, I also believe the firm's current valuation of 25 times forward earnings, does not accurately reflect its potential.

Along with Porvair's growth track record, the shares also support a dividend yield of 0.9%. The payout has grown at an average annual rate of 10% for the past five years and is backed up by £2m of net cash on the balance sheet.

So overall, even though Porvair might look expensive, I firmly believe the company's potential is understated.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Porvair. The Motley Fool UK has recommended 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.