Sunday, February 20, 2011

Best Dividend Paying Shares - The Small Caps

It's time for another 'best dividend stocks' type of post. Last time, in Highest Dividend Paying Stocks In The ASX100, I did just as the title suggests. I scoured the ASX100 looking for shares with the best income potential. While I stressed in that article that more investigative work would need to be done to whittle the list down to a handful of suitable investment candidates, I found the exercise useful and so did a number of readers.

Today's top dividend shares are all small caps. I have used the stocks which make up the S&P ASX Small Ordinaries index as a place to start my search. So based on historic dividend yield alone, I came up with the following list.

ASX Code Company Name Current Price Dividend Yield Franking Payout Ratio
TSI Transfield Services Infrastructure Fund $0.59 15.4% 0% 194%
COF Coffey International Ltd $0.84 14.1% 100% 102%
CIF Challenger Infrastructure Fund $1.18 11.9% 0% 135%
APZ Aspen Group $0.46 9.3% 0% 84%
ENV Envestra Ltd $0.60 9.2% 55% 203%
SPN SP AUSNET (stapled) $0.89 9.1% 40% 99%
CDI Challenger Diversified Property Group $0.51 8.1% 0% 72%
PMV Premier Investments Ltd $6.04 7.6% 100% 158%
AAD Ardent Leisure Ltd $1.39 7.6% 0% 94%
HST Hastie Group $0.93 7.5% 100% 54%

Best Small Cap Dividend Yields

With the top 3 companies on this list each sporting a dividend yield over 10%, these results look very impressive. However, as I did last time, I will now make a small adjustment and include only those companies with a payout ratio of 100% or less.

The purpose of this adjustment is to remove those companies whose dividend yield is not likely to be sustainable. A company can't pay out more than 100% of profits for very long. The most likely future for such a company is almost certainly one in which a lower dividend is paid.

Here is the adjusted list.

ASX Code Company Name Current Price Dividend Yield Franking Payout Ratio
APZ Aspen Group $0.46 9.3% 0% 84%
SPN SP AUSNET (stapled) $0.89 9.1% 40% 99%
CDI Challenger Diversified Property Group $0.51 8.1% 0% 72%
AAD Ardent Leisure Ltd $1.39 7.6% 0% 94%
HST Hastie Group $0.93 7.5% 100% 54%
WTP Watpac Limited $1.71 6.9% 100% 71%
SLM Salmat Ltd $4.16 6.9% 100% 79%
BWP Bunnings Warehouse Prop Trust $1.82 6.8% 0% 100%
ALZ Australand Property Group $3.10 6.7% 0% 93%
GUD GUD Hldgs Ltd $9.73 6.5% 100% 81%

Highest Sustainable Dividend Yields

The dividend yields in this list are certainly lower, but with returns ranging from 6.5% up to 9.3% (with the prospect of some capital growth thrown in), this list is certainly worthy of closer inspection.

After doing just that, I noticed that the list is somewhat overweight in property trusts or REITs (Real Estate Investment Trusts) as they are more properly called.

Now I don't have anything against property trusts. They have offered very good income prospects to investors in the past (subject to some hiccoughs during the GFC). However, when conducting my investment activities I consider these to be a separate asset class. For that reason I will filter these out from the list as well.

ASX Code Company Name Current Price Dividend Yield Franking Payout Ratio
SPN SP AUSNET (stapled) $0.89 9.1% 40% 99%
HST Hastie Group $0.93 7.5% 100% 54%
WTP Watpac Limited $1.71 6.9% 100% 71%
SLM Salmat Ltd $4.16 6.9% 100% 79%
ALZ Australand Property Group $3.10 6.7% 0% 93%
GUD GUD Hldgs Ltd $9.73 6.5% 100% 81%
HIL Hills Holdings Limited $1.87 6.0% 100% 75%
CAB Cabcharge Australia Ltd $5.84 6.0% 100% 71%
SGT Singapore Telecommunications Ltd $2.31 5.9% 0% 58%
MCP McPhersons Ltd $3.39 5.9% 100% 54%

Best Income Shares (excluding REITs)

Now we're getting somewhere. The final list has a number of good investment candidates. They all have good income potential with dividend yields of 5.9% and greater. They are a diverse group of companies across a number of unrelated industies. Seven of the ten companies pay fully franked dividends, while the eighth is franked to 40%. What's not to like?

Well for one thing, there's debt. I know that one one the companies in the list above (Hastie Group) ran into troubles with its lenders just last week and is looking like it might need to undertake a capital raising (a sure way to cut its dividend yield).

I have not applied any filters to the list for things like debt levels or financial performance (ROE, and the like). Come on - I'm not going to do all of the work for you!

I would suggest to next step would be to drill down into the financial statements of each of these companies to make sure there are no nasty surprises waiting for the unwary.

Once again I would like to stress that I am not recommending that you invest in any of the shares listed here (let Hastie group be a warning to you). The analysis above has been superficial at best, focusing on stocks with the best dividend yield. But it does give us a short list upon which we can concentrate our efforts.


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