These under-the-radar income stocks offer market-beating payouts

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Moss Bros

Andrew Sykes(LSE: ASY) is not your run-of-the-mill publicly traded company. Founded in 1857, the engineering business has developed from manufacturing steam engines to becoming "the UK's leading specialist hire company" today, providing a mixture of pumping, cooling and heating systems for virtually any need.

Around 90% of the business is owned by the 97-year-old chairman JG Murray and his family. A lot of investors are put off of investing in family-owned businesses, but I believe that a high level of 'skin in the game' nicely incentivises management to drive the company forward. In this particular instance, liquidity levels can be low and this should be considered by anyone mulling over an investment. 

Aside from massive insider ownership, there are a few points of note about the company: it has strong margins and cash flows but is not focused on driving growth.

Over the last five years, the share price has increased 220% taking it past fair value, in my opinion, given its patchy growth history. Revenue increased 16% in H1 and profit followed suit, increasing 6%, but results have historically moved within a range so I'd urge investors not to get over-excited about growth here. 

Basic earnings per share came in at 15p and 11.9p is being paid out as an interim dividend. The shares offer a 4% yield. The company is interesting, but I'm not sure the payout is enough considering the sluggish growth on show over the years and more stable FTSE100 candidates offering a similar payout with better coverage and prospects.

It is one to watch however, and I'd consider a purchase if it were to offer a 6% to 7% yield in the future. 

Suits me?

Moss Bros(LSE: MOSB) increased its interim dividend by 6.3% today. If we extrapolate that rise to the final dividend too, the shares offer a prospective 6.5% yield. That's a pretty impressive payout and might be sufficient to tempt investors away from larger, more stable cash cows. 

The group's revenue increased by 4.3% in the first half, with 2.8% like-for-like growth. These are solid figures, but it is important to note that the LFL figures include a number of shop refits that cost the company a significant amount of cash. Once the wave of refits is finished, I'd expect LFL figures to drop off a bit. Investors should take that into account when valuing the company. 

The company sells suits and accessories but also offers a for-hire service. Unsurprisingly, when one does well, the other tends to falter a bit. More recently, customers have been buying, so hiring revenues decreased 8.4%, which is a shame, given the latter's impressive 70% gross margins. 

I'm not sure Moss has much of a competitive advantage to differentiate itself from a number of other formalwear retailers and competition online. That could explain low operating margins at 6.3%, despite the profitable for-hire segment. 

The yield is only thinly covered by earnings, although more soundly so by cash flows. The company is conservatively financed too, with a cash balance of £21.5m. I reckon Moss looks attractive at current prices, but I'm still not 100% sold on the company. It has significant fixed costs and I worry a downturn could see profits evaporate rather quickly, placing pressure on the dividend. 

Diversify your dividends

The key to building an income portfolio - whether you construct it from FTSE100 behemoths or small-cap cash cows like Sykes and Moss - is to diversify so that a company or industry-specific event can't significantly diminish the dividends you receive.

With that in mind, our analysts have put together a report detailing five businesses with consistent cash flow histories, fat dividend payouts and solid long-term prospects to help you diversify or build an income portfolio. 

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Zach Coffell has no position in any of the 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.