The small cap part of the market is full of interesting opportunities. A business doesn't need to be in the ASX 100 to be considered as a dividend stock.
Small caps are generally valued at a lower price/earnings ratio, which boosts the dividend yield, because they are seen as riskier than their larger counterparts. Even if they have more growth potential. Isn't it a funny world we live in?
If you can find a share with a decent dividend yield now, it could mean good income, good income growth and good capital growth.
Here are three ideas:
Paragon Care Ltd (ASX: PGC)
Paragon currently has a fully franked dividend yield of 3.4%, which I think is solid in the current low-interest environment.
It supplies medical equipment to clients like hospitals and aged care facilities. Its single largest source of revenue is public hospitals, so it should continue to benefit from increasing expenditure due to the ageing population, even if funding per person rises at a slower rate.
Duxton Water Ltd (ASX: D2O)
Duxton Water owns water entitlements, similar to how Rural Funds Group (ASX: RFF) also has some on its balance sheet, except this is a pure water entitlement play. It currently has a partially franked dividend yield of 3.9%.
The company has just finished raising $20 million from long-standing options at $1.10 per share and it now has a market cap over $100 million. I expect the share price will continue to drift towards the NTA of above $1.20.
Water is an important resource for Australian agriculture. Water's value should go up over the long-term, particularly as Australia increases its food exports to Asia and the rest of the world.
WAM Microcap Limited (ASX: WMI)
If you don't want to identify small caps yourself then it might be worth just investing in a listed investment company which specialises in finding hidden gem small caps. WAM Microcap is currently trading with an expected fully franked dividend yield of 2.9%. I expect this yield will rise over time as the profit reserve gets bigger.
WAM Microcap's portfolio has generated a return of 28.4% since inception a year ago, before fees. Although I wouldn't expect this type of return every year, I believe that over a 10 year time frame it will deliver pleasing returns, although some years could be volatile.
Foolish takeaway
All three shares have delivered good returns over the past year and hopefully that continues over the next year and the next decade. I'm very happy to hold them in my portfolio, particularly when you add the franking credits to the above yields I wrote about.
