3 small-cap shares with fast-growing dividends

Yesterday’s decision by the RBA to cut interest rates to an all time low of 1.75% is set to have major implications for investors all around Australia.

Investors who were already struggling to generate an income from cash and term deposits will now be even more likely to move into the equity markets in the search of better returns.

But this is not without its risks.

Sure, interest rates are set to stay lower for longer but that doesn’t mean investors will necessarily be guaranteed a better result just by allocating their capital to the highest-yielding investments.

For some investors sticking to the big end of town may provide them with the best security, but I think all investors should consider some of the faster growing stocks that still pay a reasonable dividend.

Three stocks that investors could consider include:

BT Investment Management Ltd (ASX: BTT)

BTIM is one of Australia’s premier fund managers with more than $77 billion in funds under management (FUM).

Earnings momentum has gathered pace over recent years thanks to generally positive equity markets and its expansion into the UK market.

This has seen the company’s dividend more than double over the past three years with further growth expected over the next two financial years. Analysts are forecasting a dividend for FY16 and FY17 of 46 cents and 50 cents per share, respectively.

Investors need to remember this is highly contingent on equity markets remaining relatively calm but, if achieved, means investors buying at today’s share price will receive a yield of 4.5% and 4.9% over the next two years.

G8 Education Ltd (ASX: GEM)

G8 Education is the second-largest childcare centre operator in Australia with a portfolio of 471 centres. Yesterday’s budget confirmed the government will remain a key supporter of the industry over the medium term and this should help to underpin demand in the sector.

As long as G8 Education maintains a disciplined acquisition strategy and can control operating costs, it should continue to generate above average returns for shareholders.

Analysts are forecasting dividends to increase in FY16 and FY17 to 25.5 cents and 29.5 cents per share, respectively. This would provide prospective investors with a dividend yield of 6.2% and 7.2% at the current share price.

Virtus Health Ltd (ASX: VRT)

Virtus is the leading provider of assisted reproduction services (ARS) in Australia and Ireland.

As the chart below shows, the number of cycles Virtus has assisted with has been steadily increasing over the last five years.

Source: Company Presentation

Source: Company Presentation

This trend is likely to continue as there is a growing proportion of the population that is waiting longer before starting a family and, combined with improvements in technology, this is a huge tailwind for ARS providers such as Virtus.

Investors should not expect explosive earnings growth from Virtus, but rather a consistently growing company that will have the ability to pay a reasonable dividend.

Analysts are forecasting a dividend for FY16 and FY17 of 30.4 cents and 32.2 cents per share, respectively. The shares are currently trading at $6.70 which means investors can expect to receive a yield of 4.5% and 4.8% over the next two years.

Foolish takeaway

The hunt for yield is likely to increase over the next few months and I think investors could do well if they consider smaller stocks that have a good chance of increasing their dividends over the next few years.

Are you looking for a stock that blows term deposits out of the water with a fully franked 8% dividend yield?

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Motley Fool contributor Christopher Georges owns shares of G8 Education and BT Investment. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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