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2 small cap dividend stars

For some reason investors often put shares into two different categories of growth or dividend shares.

That can understandable when you’re comparing Commonwealth Bank of Australia (ASX: CBA) and Altium Limited (ASX: ALU), but not the case in every situation.

I think small cap shares can be a good way to get both dividends and growth. Small caps are generally valued at a lower price/earnings ratio, which has the pleasing effect of boosting the dividend yield if they pay a dividend.

Here are two small caps with solid dividend yields:

Paragon Care Ltd (ASX: PGC)

One of my favourite ideas at the moment is Paragon. It’s a growing supplier of items such as beds, devices and equipment to clients such as hospitals and aged care facilities.

It has a single purchasing platform and is steadily increasing the number of items sold on there through acquisitions, expanding the offering to clients.

The number of patients is expected to grow substantially in the coming decades, with the number of people over 65 projected to grow by 70% in the next 20 years. This should provide a decent organic growth tailwind as it supplies more products.

Paragon has steadily increased its dividend each year since 2013 and currently has a grossed-up dividend yield of 6%.

Duxton Water Ltd (ASX: D2O)

Duxton Water is a company that aims to purely own water entitlements and lease them out on short-term and long-term leases.

It’s currently benefiting significantly from the drought conditions we are seeing in regional areas, sending the water prices higher.

Over the long-term Duxton Water can benefit from the lease income and the growing value of the water entitlements.

I also like that Duxton Water is indirectly exposed to the agricultural sector which has long-term growth potential.

Duxton Water currently has a partially franked dividend yield of 3.7%.

Foolish takeaway

I like both of these businesses as long-term growth ideas, the growing dividends are just a bonus. At the current prices I think Paragon looks attractive at around 10x FY19’s underlying earnings.

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Motley Fool contributor Tristan Harrison owns shares of Altium, DUXTON FPO, and Paragon Care Limited. The Motley Fool Australia owns shares of Altium. 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.