2 mid-cap dividend kings in the making

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dividend king

Investing in a Georgian bank probably isn't most domestic investors' first thought when seeking out high income shares, but BGEO Group (LSE: BGEO), the holding company for Bank of Georgia, may be an underrated option worth checking out.

The group currently pays out a 2.59% annual yield and this figure should only grow in the coming quarters as BGEO hives off its investment business, which owns healthcare, energy and beverage assets, into a separate London-listed vehicle. This will allow investors interested in Bank of Georgia's 23.5% return on average equity (RoE), double-digit revenue growth and commitment to paying out 25%-40% of earnings in dividends to invest directly in it.

Of course, investing in a foreign bank carries significant macroeconomic risks, but Bank of Georgia has plenty of characteristics that still make it worth considering. For one, the aforementioned RoE shows just how profitable the bank is, due to relatively low costs, higher interest rates than in the UK, impressive market share, and none of the legacy fines or bad assets that have weighed down returns for British banks.

Second, the bank is expanding rapidly, but in what appears to me to be a more sustainable way than, say, British and American banks did before the financial crisis. It is growing its revenue largely by rolling out new retail banking outlets and investing in digital platforms that saw its retail banking revenue rise 29.1% year-on-year (y/y) in H1.

Now, BGEO group is not cheap by traditional metrics with a price-to-book ratio of 1.9, which for now also includes the investment assets. However, with sales and margins growing, a relatively healthy capital buffer and high growth and income potential, I reckon income investors who have an elevated risk tolerance would do well to dig deeper into the company.

Back in the black 

Another option in the same vein is Ukrainian iron ore pellet producer Ferrexpo (LSE: FXPO). The recent commodity crisis was particularly harsh for the company as it was hit by both lower prices and the collapse of its major bank that wiped out significant cash reserves. However, its recovery is going well and dividends have been restored with analysts expecting a 7.06p payout and 2.4% yield this year.

Looking forward, there's reason to expect this dividend to continue creeping up as demand for its relatively high-quality iron ore pellets is rising due to Chinese steelmakers shifting production towards higher quality and lower emission steel production. Higher prices are also improving the company's financial position with net debt-to-EBITDA down to 0.96 times at the end of H1, which should provide more leeway for management to juice dividends.

Now, the risks involved in investing in a commodity producer should be clear to all investors. However, with Chinese steelmakers still producing unbelievable amounts of steel, the short-term outlook for Ferrexpo's product looks fairly sound. If the company can continue to rapidly deleverage and begin re-directing a higher percentage of rising cash flow to shareholders, the company could be an interesting income option.

But if a Georgian Bank and Ukrainian commodity producer are just too risky as income options for you, I recommend reading the Motley Fool's free report, Five Shares To Retire On. These five stocks have outperformed their FTSE 100 index over the past decade thanks to non-cyclical growth, premium pricing power and huge shareholder returns.

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Ian Pierce 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.