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Why these small cap dividend shares are on my watchlist

Unfortunately for income investors many of Australia’s most popular dividend shares such as Telstra Corporation Ltd (ASX: TLS) are going through an awkward stage at the moment and appear more likely to cut their dividends than increase them.

The good news is that at the small end of the market there are several top shares which I think could grow their dividends meaningfully over the coming years.

Two that I think investors should take a closer look at are list below:

Collection House Limited (ASX: CLH)

This receivables management company could be worth a look after bouncing back strongly from a period of weakness. I expect Collection House to have a strong FY 2018 after it committed to a higher level of investment in purchase debt ledgers (PDL). Originally management planned to invest up to $65 million, then up to $75 million, and then finally upwards of $84 million in PDLs. Pleasingly, it expects to generate higher returns on these investments compared to previous years due to improvements in collection efficiencies, technology adoption, and improved data analysis. I believe this puts it in a strong position to achieve the high end of its guidance range of 18 cents to 18.5 cents earnings per share. This represents growth of 24% on FY 2017. At present its shares provide a trailing fully franked 5.6% dividend.

Duxton Water Ltd (ASX: D2O)

Duxton Water is a listed company that provides investors with direct access to water through Australian Water Entitlements. These are perpetual rights to Australia’s limited water supply. In its update last month management advised that lower storage volumes and drier forecast conditions are pointing towards significantly lower water availability in the 18/19 Water Season. This could put Duxton Water in a positive position to profit over the next 12 months and allow it to grow its dividend. At present its shares provide a trailing partially franked 4% dividend.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra 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.

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