2 small-cap income stocks with monster dividends

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DFS sofa

AIM-listed Telford Homes(LSE: TEF) received a nice little boost earlier this month when management confirmed that it was expecting to report record levels of revenue and profits for the year to 31 March 2017. Shares in the London-focused residential property developer have rallied since the announcement on 5 April, gaining 60p or 17% in just three weeks. So could this be a sign of better things to come from Telford, or is this just a flash in the pan?

London-focused

With a market capitalisation of just over £316m, Telford Homes doesn't get as much media coverage as other larger housebuilders such as Barratt Developments or Taylor Wimpey for instance. But does that make it a less attractive investment? Of course not.

Despite the name, Telford Homes isn't based in Telford, Shropshire, but in Waltham Cross, just outside London, in Hertfordshire. And that's pretty handy because the group specialises in new homes and apartments in non-prime areas in and around the capital.

Not too shabby

Last year the housebuilder increased its revenues by over £102m to £242.7m, and this year hopes to go even higher, with analysts predicting £354m for the year just ended 31 March, and £408m for the current fiscal year to March 2018. That's not too shabby given the fact that group revenues were reported at just £94m only three years ago.

The board believes that Telford is on track to deliver pre-tax profits in excess of £40m for the current financial year, with £50m anticipated for FY 2019. The build-to-rent pipeline now represents 483 homes with a combined contract value of £232m, with over 80% of anticipated gross profit for the year to 31 March 2018 already secured, and over 60% for March 2019.

The housebuilder has substantial forward sales at around £550m, with a development pipeline that exceeds £1.3bn and represents more than four times revenue expected in the year to 31 March 2017. Telford's dividend payouts have been rising rapidly in recent years, and the shares now offer a solid yield of 4.2%, rising to 4.7% by fiscal 2019. What's more, double-digit earnings growth means the shares are a steal at just nine times earnings for the current year to March, falling to seven times by FY 2019.

Special dividend

Another London-listed company that will be rewarding its shareholders with a generous dividend payout is DFS Furniture(LSE: DFS). The Doncaster-based group reported a strong first half with revenues rising 6.8% to £379.9m, and gross sales during the previous 12 month period exceeding £1bn for the first time.

Management duly decided that it was time to return some cash to its shareholders. DFS will now pay a special dividend of 9.5p per share in addition to the declared interim payout which itself was hiked by 5.7% to 3.7p per share and paid out at the same time on 21 June.

Things certainly seem to be progressing nicely, with DFS achieving like-for-like growth through established stores, while also benefiting from new store openings and a double-digit percentage increase in online sales. The shares trade on a very reasonable P/E rating of 11, supported by a well-covered dividend boasting a 5% yield.

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Bilaal Mohamed 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.