While many large cap shares offer investors generous dividends, I’m not expecting much by way of growth from them in the short to medium term.
So if you’re an income investor on the lookout for dividends with solid growth potential, I would suggest you check out the three small cap dividend shares listed below. Here’s why I like them:
Baby Bunting Group Ltd (ASX: BBN)
Baby Bunting is a baby products retailer that has been a victim of its own success. Clearance sales from closing competitors have weighed heavily on the company’s performance in FY 2018. But I think investors ought to look beyond this short term headwind and to the long term tailwinds that the significant reduction in competition will bring it. While its dividend may be flat at best this year, I believe it could grow significantly from FY 2019 onwards as its market share increases. At present Baby Bunting’s shares offer a trailing fully franked 4.8% dividend.
Collection House Limited (ASX: CLH)
I’ve been very impressed at the way this receivable management company has turned around its fortunes after a tough couple of years. This year management expects Collection House to grow its earnings per share by between 23% to 24% year-on-year. Considering the company has traditionally paid out around 55% of its earnings as dividends, I believe it could pay out as much as 10 cents per share as a dividend this year. Based on that estimate, Collection House’s shares offer a fully franked 6.5% yield.
Paragon Care Ltd. (ASX: PGC)
Although this provider of integrated services to Australia’s health and aged care markets doesn’t pay the biggest dividend in the small cap space, I believe it could grow meaningfully in the future. At present Paragon Care’s shares offer investors a trailing fully franked 3.9% yield. But if the company’s recent acquisition spree helps it generate above-average earnings growth over the coming years, I suspect this dividend could increase at an equally quick rate.
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You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Paragon Care 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.