3 quality small cap companies I’d buy for the dividend

Photo: SantiMB.Photos

There are a limited number of ways a company can use the cash that it generates.

First, it can reinvest it back in the business in order to grow the business. This is a god idea if each dollar reinvested can return meaningfully more than one dollar in value for shareholders.

Second, a company can pay down its debt. This is a good idea if the interest rate on its debt is higher than the company could expect to get by reinvesting the money in the business, or if debt is becoming too high.

Third, the company can use its cash to acquire other, complementary businesses. This is a good idea if there are genuine synergies between the businesses that mean the return on the cash used to acquire other businesses is beneficial for shareholders.

Lastly, a company can return cash to shareholders if it cannot use it in a manner that generates sufficient returns. As such, small cap companies who are in growth phases might generally be dissuaded from paying out large percentages of their earnings to shareholders. However, this is not always the case.

Here are three quality small-cap companies, which have the cash to pay a good dividend to shareholders.

Servcorp Limited (ASX: SRV)

Servcorp provides executive services and virtual offices, as well as IT, communication and secretarial services worldwide. Servcorp paid a dividend of 26 cents in 2017 at a payout ratio of 63%. At the current share price, that represents a return of 5.4%. Analysts have forecast a dividend of 26 cents again in 2018.

OFX Group Ltd (ASX: OFX)

OFX Group offer international payment and foreign exchange services. Last year, it paid a dividend of 5.7 cents per share, a return of 3.7% at the current share price and a payout ratio of 71%. Analysts have forecast a dividend of 6 cents in 2018, a return of 3.9% if you buy the shares today.

APN Outdoor Group Ltd (ASX: APO)

APN Outdoor is an outdoor advertising company that operates in Australia and New Zealand. It offers advertising via digital and static billboards, as well as transit, rail, and airport advertising. Its 2017 dividend was 19.2 cents, representing a 4.6% return at the current share price. To achieve this, its payout ratio was 64%. Analysts have forecast a dividend of approximately 19 cents again in 2018.

Foolish takeaway

Small caps don’t always retain their earnings for the purposes of growth. Servcorp, OFX Group and APN Outdoor are small cap companies that earn good cash profits and can pay a good percentage of these out to shareholders.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Servcorp 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.