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How to own small-cap shares without sacrificing dividends

Most investors look at small-cap shares as offering higher growth opportunities. And in turn, they accept the lower dividends on offer in the hope that the growth makes up for it.

Smaller businesses may often be reinvesting heavily, and not have a strong enough market position to allow them the flexibility of paying shareholders a regular income.

But what if there was a way to have both? Be invested in small-cap shares, yet receive a strong level of income.

Well there is. By investing in listed investment companies (LICs) which focus on small-cap shares. Here’s a couple to consider for further research…

Naos Emerging Opportunities Company Ltd (ASX: NCC)

This Naos LIC has now been listed on the ASX for around 5 years.  The company holds a concentrated portfolio of stocks outside the top 100, with just 9 companies in the portfolio currently.

Since inception, the portfolio has outperformed the market comfortably before fees, and to a lesser extent after fees.

Naos has paid a solid level of income since listing and the dividend has been increased every year. This LIC carries greater risk than many others due to the concentrated nature of the portfolio, so it’s not one I’d put a massive amount into.

Shares currently trade on a grossed-up dividend yield of 8.4%.

Mirrabooka Investments Ltd (ASX: MIR)

This LIC is managed by the same folks that manage Australian Foundation Investment Co. Ltd (ASX: AFI).

Mirrabooka is internally managed and has a lower fee than Naos. It’s also been listed for much longer, since 2001.

It holds a large portfolio of small and mid-sized companies outside the top 50, which it expects to have solid growth over time. The LIC regularly pays out a strong level of income to shareholders, which mostly comes from realised capital gains within the portfolio.

Shares currently trade at an estimated 5% premium to NTA, and a grossed-up dividend yield of 6.4%.

Foolish takeaway

There we go – a couple of ways to get big dividend yields from small-cap shares, without the risk of a single one or two high-yielding shares. Of course the trade-off is, you’re unlikely to get massive growth from LICs like these because of this diversification, but decent growth combined with a fully franked dividend stream.

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Motley Fool contributor Dave Gow owns shares of Mirrabooka Investments Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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