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While the following stock ideas won’t appeal to everyone – given most of the suggestions herald from the ‘mid-cap’ sector rather than the large cap / blue-chip segment – there are reasons to favour these smaller companies when seeking to build an income generating portfolio.

Firstly, they still pay fully franked dividends, but additionally they are trading on yields even more attractive than most of their larger peers. Secondly, while it is true that smaller companies are more prone to being forced to cut their dividends as they don’t possess as stable earnings bases, on the flip side they also have the potential to grow their dividends at a faster growth rate too.

Southern Cross Media Group Ltd (ASX: SXL) is engaged in commercial radio broadcasting across Australia and is forecast to pay 9.1 cents per share (cps) in fully franked dividends for the current full year. With the share price at $1.35, the stock is trading on a dividend yield of 6.7%.

Data#3 Limited (ASX: DTL) provides IT solutions to a broad range of customers. The company is currently operating in difficult industry conditions which are expected to cause a drop in the full dividend from 7 cps to 5 cps. However even after this decline, the stock is still trading on a yield of 7.5%.

STW Communications Group Ltd. (ASX: SGN) is a major marketing and communications company not just in Australia but increasingly in Asia as well. The fully franked dividend is forecast to grow this year to 9 cps; with the shares trading at $1.47, the stock is trading on a yield of 6.1%.

RCG Corporation Limited (ASX: RCG) operates a number of retail footwear stores and also holds distribution licences for a number of footwear brands in Australia. The business has done well to achieve growth despite a difficult retail environment. With a forecast fully franked dividend of 4.5 cps, RCG shareholders should enjoy a yield of 6%.

Foolish takeaway

For many investors, blue-chip stocks are the ‘go-to’ when creating an income portfolio, however looking beyond these stocks to the mid-cap sector can yield even higher returns in the long run, although there may be a slightly higher level of volatility.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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