2 small-cap dividend stocks I'd buy and hold for the next decade

Good quality small-cap dividend stocks can be great investments. In addition to an attractive income, their small size means that capital gains can be greater than with big-cap stocks.

Today I'm going to highlight two small dividend stocks I believe could be profitable long-term buys.

A long-term cash machine?

Fulcrum Utility Services (LSE: FCRM) has two main sources of revenue. Much of the group's income comes from building gas and electricity infrastructure for property developments, such as factories and housing estates.

However, the group is also licenced to own and operate gas and electricity distribution networks, such as those it builds and others it acquires. This business attracts me, as I believe it should provide long-term recurring revenue, in addition to the cyclical income from new-build projects.

Today's half-year results suggest that both businesses are performing well. Revenue rose by 8.3% to £19.6m during the six months to 30 September, while pre-tax profit climbed 19.4% to £3.7m.

Fulcrum ended the period with an order book worth £33.7m, up by 11% from the end of March. Shareholders will be rewarded with an interim dividend of 0.7p per share, a 17% increase on last year's payment.

How cheap is the stock?

Fulcrum shares have performed strongly this year and are no longer in bargain territory. But, I think the shares may still be attractive. The company hopes to expand its utility asset ownership, and is expanding its services in the area of electric vehicle charging infrastructure.

Consensus forecasts put the group on a forecast P/E of 16 for this year, with a prospective yield of 3.1%. This valuation is supported by net cash of £14.5m, which now accounts for around 12% of the share price. In my view, the stock remains worth buying.

A sustainable 9% yield?

A dividend of 9% is usually seen as a warning of problems to come. But once in a while, the market throws up a genuine opportunity to lock in a massive income.

I believe Connect Group (LSE: CNCT) could be one such stock. This group's main business is the distribution of newspapers and magazines to retailers. It also has a parcel business, Tuffnells, and a specialist book-selling unit. Concerns about the group's future focus on falling sales of newspapers. The company is hoping to adapt to this situation by finding other opportunities for early morning deliveries.

Last year's results showed resilient trading. Although revenue and profits fell by around 3%, Swindon-based Connect generated earnings and free cash flow of around 11p per share, providing cover for its dividend payout of 9.8p per share.

That's equivalent to a yield of 9%, at the last-seen share price of 109p.

Crucially, last year's sale of Connect's education division enabled management to reduce net debt from £141.7m to £82.1m. I see that as a fairly comfortable level of borrowing relative to the group's profits, which are running at around £35m-£40m per year.

I'm considering a buy

The outlook for this year is fairly similar. Adjusted earnings of 16p per share put the stock on a forecast P/E of just 6.7, while a forecast dividend of 10p per share should give a yield of 9.3%.

I believe this valuation is probably too cheap, given the apparent stability of the group's trading.

Today's top small-cap buy?

Connect and Fulcrum both seem attractive to me. But our analysts have identified another small-cap stock which they believe could rise by up to 58%.

This growth business looks attractively priced to me and I believe it deserves a closer look. If you'd like to know more, you can find full details of this potential bargain buy in our exclusive report, 1 Top Small-Cap Stock From The Motley Fool.

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Roland Head owns shares of Fulcrum Utility Services. 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.

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