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4 small cap dividend stars

The small cap world is avoided by most investors looking for income for some reason. Just because Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) are large doesn’t mean they will provide more income or safer income than a small cap. Indeed, Telstra cut its dividend payment by almost a third recently.

I think small caps can offer excellent income and growth potential. Here are four options that could generate attractive income:

Duxton Water Ltd (ASX: D2O)

Duxton Water is a company which is a pure-play on owning water entitlements and leasing them out to agricultural businesses.

Water is a very valuable commodity – there is only so much fresh water in the world after all. The value of the water entitlements could increase over time leading to capital growth and income growth.

It’s currently trading with a partially franked dividend yield of 3.8%.

Paragon Care Ltd (ASX: PGC)

The healthcare industry is perhaps the most defensive sector of them all, far more defensive than the banks that’s for sure. Paragon is a distributor of healthcare equipment, devices and beds to clients like aged care facilities and hospitals.

The demand for health items is likely to go up over time thanks to an ageing population. Paragon is also acquiring more distribution businesses to increase its offering.

Paragon has a low(ish) payout ratio yet has a pleasing grossed-up dividend yield of 5.4% thanks to its low price/earnings valuation ratio.

WAM Microcap Limited (ASX: WMI)

If you are still unsure about choosing individual small cap ideas yourself then a listed investment company (LIC) with expertise in identifying opportunities could be what you need for your portfolio.

WAM Microcap is led by Geoff Wilson and his investment team, it looks for businesses with market caps under $300 million at the time of acquisition. There are hidden gems in this area of the market which can create big returns if chosen right.

WAM Microcap has had a fantastic first year since listing and is already paying a projected grossed-up dividend yield of 3.9% for FY18. This yield is likely to grow in time.

Naos Emerging Opportunities Company Ltd (ASX: NCC)

This LIC also looks at small caps and it has been operating for several years. It has built up a decent profit reserve, allowing it to pay a large grossed-up yield of 8.8%.

It looks for shares with a market capitalisation of under $250 million and takes a long-term investment approach by aiming to hold the business for three or more years. Sometimes this can lead to underperformance in one-off years, particularly as it only holds around 10 shares, but over the long-term quality picks turn into strong returns.

Foolish takeaway

At the current prices I’m drawn to Paragon and the Naos LIC for income as the yields are higher and they are both trading at nice prices for the current underlying value. However, WAM Microcap could be the best performer over the long-term due to its lower fees and long-term historical performance, which is why I hold it in my portfolio.

Here's another ASX share that could be an excellent long-term option for income and is only a fraction of the size of Commonwealth Bank.

Breaking news: ASX companies set to raise dividends!

It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

Click here it's FREE!

Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO, Paragon Care Limited, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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.

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