With a potential slowdown in the UK economy and falling commodity prices putting the dividends at some of the UK's biggest companies at risk, I believe income investors should look at high-yielding shares from outside of the FTSE 100 Index.
Here are three attractive high-yielding small-cap shares that I think are worth buying right now.
Growing cash flows
Closed-book insurer Chesnara(LSE: CSN) is a great example of why strong cash generation sets the stage for big dividends. Although earnings can be volatile for insurers because of the uncertain nature of investment returns and the timing of customer claims, strong cash flows at Chesnara have enabled the company to grow its dividend in each of the last eleven years.
Investors should also note that Chesnara raised its dividends by 3% in each of the past five years, but I think a faster rate of dividend growth could be due because of its improving operational performance and growing cash flows. Gross cash generation has consistently exceeded dividends in each of the past five years, and in 2015, it covered dividend payments by nearly 1.9 times. Earnings cover is also robust, at above 1.7 times.
The stock currently yields 6% and trades at a forward price-to-earnings (P/E) ratio of 13.3.
Strong earnings momentum
Electrical components maker XP Power (LSE: XPP) is worth a closer look because of its strong earnings momentum and favourable underlying fundamentals. Dividends ultimately depend on earnings, and a strong outlook for earnings growth creates the potential for future dividend increases.
Thanks to strong demand for the kind of energy efficient power control components that XP Power manufactures, analysts expect earnings for the company to grow by 4% this year, with a further 8% gain forecast for 2017. Its dividend, which was 66p per share for the 2015 full year, is expected to rise to 70p this year, representing an increase of 6%.
At a share price of 1,625p, XP Power currently trades at a forward P/E of 15.2 and the dividend yield stands at 4.1%.
Massive 7.9% yield
Finally, if you're looking for an investment with a much higher yield, then Doric Nimrod Air Three(LSE: DNA3) could be just the right pick for you. Doric Nimrod Air Three is the newest of the three listed aircraft leasing investment vehicles from specialist investment manager Nimrod Capita, which focus on buying brand new Airbus A380 aircraft and leasing them to Emirates, one of the fastest growing and most profitable airlines in the world.
With the steady rental income that the company receives, it pays a quarterly dividend of 2.065p per share, giving its shares a current yield of 7.9%. The dividends are fixed until the company's leases begin to expire after their initial lease terms.
And as the newest of the three A380 investment vehicles, DNA3 is particularly noteworthy because it has a longer average remaining lease length of over nine years. One of the biggest risks of a leasing business is not being able to find someone to buy or rent the asset once the current lease expires. This means investors going after predictability and stability of income should invest in rental assets with long remaining lease lengths.
5 stocks you can rely on?
Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended XP Power. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.