2 under-the-radar small caps for income-seeking investors

360 Capital Total Return Fund (ASX:TOT) and Countplus Ltd (ASX:CUP) are two little-known income stocks.

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At a time when Australia's official cash rate sits at 1.75%, income reliant investors will find it more difficult than ever to find predictable dividend-paying stocks within the S&P/ASX 200 Index (ASX: XJO).

Whilst the usual suspects of Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) continue to churn out dividends every six months, it is likely these stalwarts of the Australian market will not experience stellar capital growth in the years ahead.

Furthermore, the downside risk for these companies increases as payout ratios outgrow earnings, meaning many 'reliable dividend stocks' could follow Australian and New Zealand Banking Group's (ASX: ANZ) example and cut dividends.

Accordingly, income-seeking investors may need to venture outside of conventional blue chip shares and look to small cap stocks which offer substantial yield and growth potential.

360 Capital Total Return Fund (ASX: TOT) ("Total Return Fund") and Countplus Ltd (ASX: CUP) are two stocks which I think fit the bill. Here's why.

Total Return Fund

The Total Return Fund listed in April 2015 at an issue price of $1.25 per stapled unit. It is managed by listed investment manager 360 Capital Group Ltd (ASX: TGP). Its mandate is to generate a total return of 12% per annum though selective investment in real estate assets and undervalued REITs.


For the half year ended 31 December 2015, the Total Return Fund delivered an annualised 14.4% return through distributions totalling 8.32 cents per security and a 4 cents per security gain to its net tangible assets (NTA).

The Total Return Fund continued its solid performance in the second half, announcing an on-market buyback to lift its share price closer to its NTA value of $1.29 (as at 31 December 2015), paying two more quarterly tax-deferred distributions of 1.5 cents per stapled security along the way.

The fund currently forecasts FY16 distributions to be about 8.51 cents per security, placing it on a respectable trailing yield of 7.2% at current prices.

With Australian property prices also growing steadily, the fund has long-term tailwinds.


Countplus is an accounting and financial services aggregator with a 5.04% stake (or 5,882,540 shares as at 31 December 2015) in listed cloud based SMSF administration software provider Class Limited (ASX: CL1).

The equity stake in Class provides Countplus' shares with the impetus to grow in value, as the underlying investment in Class swells day-by-day. Accordingly, investors in Countplus benefit from both companies' growth.

The yield

Countplus pays (and has paid since listing) a quarterly dividend of 2 cents per share, providing it with a robust trailing yield of 9.1% before tax at current prices. Importantly, this dividend is fully-franked, meaning the yield surges to almost 13% after tax.

Foolish takeaway

Small cap stocks are inherently risky given their lack of a proven track record. Nonetheless, small cap shares are a great hunting ground for high yielding investments as management generally compensates investors for a company's perceived risk.

Whilst this means the Total Return Fund and Countplus are not as safe as conventional blue chip shares, both companies look poised to provide a reliable income stream to investors with the prospect of capital growth.

Motley Fool contributor Rachit Dudhwala owns shares of 360 Capital Total Return Fund and Countplus Limited. The Motley Fool Australia owns shares of Class Limited. 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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