It’s common for investors to hunt for passive income dividend stocks among big-cap and mid-cap companies, such as those found in the UK’s FTSE 350 index.
However, one small-cap business I’ve discovered has a forward-looking yield above 5.5% and it’s building up a decent multi-year dividend record.
Income and business growth potential
Many small-cap businesses focus on growth, and that often means spare capital is ploughed back into operations rather than distributed to shareholders. But this company’s doing both, and that’s rare.
It’s called Cake Box Holdings (LSE: CBOX) and operates as a franchise retailer and manufacturer of cakes. The business has been growing fast, and now has around 225 stores in the UK.
The franchise expansion model is key to the firm’s growth and the company doesn’t directly own or operate any Cake Box stores.
In some ways, the business model is quite niche. The cakes are egg-free, and the directors believe there’s no detrimental effect on taste or texture because of that. However, the absence of eggs allows the business to target “a much larger potential market”.
City analysts anticipate double-digit percentage advances in earnings in the current trading year to March 2025 and the year after. They also expect the dividend to chip up by single digits in both years.
Since 2021 – after the pandemic lockdowns – the record for the dividend’s impressive. There’s been a rise every year, and the compound annual growth rate is running at just over 20%.
We almost never see dividend growth as big as that from the larger passive income dividend stocks such as National Grid, Legal & General and others. So that’s one of the main reasons I think Cake Box Holdings is worth further research and consideration now.
The stock could sit well in a diversified portfolio of dividend-paying stocks. But as well as the potential for a growing income from dividends, shareholders may see capital appreciation from a rising share price.
Can strong growth continue?
However, such outcomes aren’t certain. There are plenty of risks.
For example, the market capitalisation is tiny at about £69m, and small-caps are known for the volatility often experienced in their operations and share prices. A quick glance at the chart shows this one is no different.
It’s unknown when the rate of business expansion will slow. Perhaps that will be soon. After all, the focus of operations seems to be quite narrow.
Will cream cakes lose popularity? Maybe. If that happens, the dividends and the share price may plunge like a stone. There’s also the possibility of competitors eating into the company’s market share.
Nevertheless, small-cap businesses often find ways to keep growing, and this one has proved its business model. Revenue, cash flow, earnings and dividends have all been growing consistently over several years.
There’s also a small net cash position on the balance sheet rather than net debt, suggesting the growth story is well-financed.
I’m tempted to dig in with further research now. But if buying the stock, I’d aim to mitigate some of the risks by reducing my normal position size.
