Creating a passive income stream would be on many New Year's resolution lists this year. Investors like you and I will be scouring the markets for dividend-paying investments to line our pockets.
However, the humble small-cap shares of the ASX are often overlooked during this undertaking.
It is important to remember there are more dividend opportunities in the Aussie market than just the big four banks and a few mining giants. Why is it important?… Because if you're looking at a long time horizon, small-caps — on average — outperform the big end of town.
In my mind, that's the equivalent of having your cake and eating it too! After all, there is no rule in investing that says you can't have dividends and growth.
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Which ASX small-caps I'd buy for passive income
To try and capture the best of both worlds, I've whittled my way down to two ASX small-cap shares that could provide phenomenal income. To make the list, these companies needed a market capitalisation between $300 million to $2 billion and provide a yield above 4%.
HealthCo Healthcare and Wellness REIT (ASX: HCW)
This first one is a little different from the rest, being a real estate investment trust (REIT). The HealthCo REIT was spun up by the HMC Capital team — the team behind the successful acquisition and repurposing of the former Masters' portfolio from Woolworths in 2017.
As the name suggests, the REIT is focused on developing and managing a high-quality property portfolio leasing to a variety of healthcare tenants. These tenants include Chemist Warehouse, Griffith University, G8 Education, and Uniting Care Queensland.
Furthermore, the high occupancy of 99% and weighted average lease expiry (WALE) of 10.2 years are reassuring metrics for passive income certainty. This ASX small-cap share currently offers a dividend yield of 4.3%.
Smartgroup Corporation Ltd (ASX: SIQ)
Next up is a company that has had its share price battered and bruised over the past year. Shares in the salary packaging and novated leasing provider have sank 31% compared to a year ago, as shown below.
Relatively flat revenue and the loss of its contract with the Department of Education and Training Victoria have rattled shareholders. Nevertheless, the company has a proven history of delivering earnings and dividend growth.
At a price-to-earnings (P/E) ratio of 10.5, Smartgroup looks like a value opportunity for passive income and further upside. The trailing dividend yield is around 12.8%.
While I suspect this will fall in 2023, I believe dividends will still be solid thanks to Smartgroup's thick profit margin — typically above 20%.
