2 secret dividend stocks you might regret not buying

The best quality dividend stocks aren't always the most well-known names. Hunting among smaller companies can sometimes reveal some very attractive sources of income.

Earnings have risen by an average of 18% per year since 2011 at recruitment firm Staffline Group (LSE: STAF). And the firm's momentum -- helped by acquisitions -- seems to remain strong.

Staffline published its full-year results this morning, revealing a 28% increase in pre-tax profit to £24.1m. Revenue climbed by 8.5% to £957.8m, highlighting the improvement in the firm's pre-tax profit margin, which rose from 2.1% to 2.5%.

A tale of two halves

Staffline has two main divisions. The recruitment division specialises in providing workers for sectors such as transport, agriculture, retail and manufacturing. In 2017, Staffline's operations provided 52,000 workers per day to more than 1,500 clients.

The other part of the company is PeoplePlus, which runs training and employment programmes, mainly for public sector clients. One risk is that the main contributor in this sector, the Work Programme scheme, is currently winding down. Underlying profits from PeoplePlus fell by 10% last year.

However, the company is involved in a number of other such public sector schemes and says that the new Apprenticeship Levy "has created a huge new market" which represents "an excellent growth opportunity" for the firm.

Impressive track record

Falling profits from Work Programmes may mean that Staffline's overall profits flatline for a while. Earnings per share growth is expected to be just 2.7% this year. However, the company has an impressive track record of growth and a strong balance sheet. With the stock trading on a forecast P/E of 8.6 with a prospective yield of 2.9%, I think this could provide a decent long-term opportunity for investors.

A super City dividend

Stockbroker Numis Corporation (LSE: NUM) makes most of its money by helping companies raise funds on the stock market and assisting with other corporate transactions. It's a cyclical business and when times are good, it's extremely profitable.

The group's last set of results show that Numis generated an operating margin of 29% on revenue of £139.1m in 2016/17. Costs are fairly low, as the company only has around 200 staff and some office accommodation to pay for. As a result, Numis generated £39.9m of free cash flow last year, after using a further £3.3m of cash to purchase shares for employee bonuses.

This is a useful reminder that the value of this business lies in key staff members, who are usually well rewarded. But unlike some small financial firms, Numis does seem to focus on shareholder returns as well as staff remuneration. The company paid out £13.5m in dividends last year and spent almost £20m on share buybacks.

Looking ahead

Although the direction of the market is largely unpredictable, comments made with December's results suggest to me that management are reasonably confident about the year ahead.

The group has certainly taken advantage of strong trading in recent years to strengthen its balance sheet. Net cash was £133m at the end of September, equivalent to four years' after-tax profits.

The firm's unbroken dividend track record suggests that the payout would be maintained, even in the event of a market correction. With this in mind, the stock's forecast P/E of 12 and 3.6% yield looks fairly attractive to me.

Finding the next big winner

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Roland Head 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.

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