Understandably, most private investors gravitate towards the biggest and best-known companies (think Lloyds Bank, Royal Dutch Shell and GlaxoSmithKline), either through buying their shares directly or by purchasing a fund that focuses on holding a selection of these giants.

Today, however, I’ve picked out two far smaller businesses that not only have great income credentials but also, I suspect, offer the possibility of decent capital growth.

Focused on 2020

Based on recent trading, you might wonder why I’m positive on “image capture and content creation solutions” provider (that’s camera accessories, supports, prompters, monitors and lighting to you and me) Vitec Group (LSE: VTC).

Results for the first half of 2019 weren’t particularly inspiring. The US/China trade war and “some disruption to the photographic market” left revenue pretty much flat at £184.2m compared to the previous year. Pre-tax profit fell almost 16% to £16.6m and net debt increased to £108.4m from £43m, partly as a result of acquisitions.

In spite of this, it’s important to highlight that Vitec made no changes to its FY19 guidance. At 14%, adjusted operating margins also remained decent and in line with the company’s mid-teens-digit target.

By far the biggest positive in my view, however, was the fact that wireless chip maker Amimon (purchased in November last year) has now been fully integrated. This means Vitec’s plan to launch wireless video products into the broadcast sports market next year is on track. This development, coupled with the company being heavily involved with the Tokyo Olympics (as well as the US Election), leads me to suspect that the current valuation of 14 times earnings could turn out to be rather cheap by next year.

And the dividends? The 3.1% yield might appear very average, but it’s been consistently hiked over the years — exactly what those looking for regular income should be searching for. What’s more, this year’s cash returns should be covered well over twice by profits.

Galloping dividends

A second stock that I think warrants further investigation is RM (LSE: RM) — a company that supplies products and services to education markets, both here and abroad. 

This small-cap’s shares have been in excellent form over the last 12 months, rising a little over 50%. Based on July’s interim results, I think there could be more good news ahead.

Although revenue rose only 1% (to £95.5m) thanks to “a difficult UK schools market“, international sales rose 33%. Adjusted operating profit also jumped 17% to £9.7m, helped in part by improvements in RM’s Results and Education divisions. Margins rose to 10.2% from 8.8% and net debt dropped by £2.2m to £21.2m. Lots of good numbers there.

The great thing about all this is that RM’s shares can still be picked up for just 11 times expected earnings. Considering the company generates high returns on capital employed on a consistent basis, that looks rather cheap to me. 

Like Vitec, RM’s 3% yield isn’t exactly worth writing home about on its own. Look underneath the bonnet, however, and you’ll discover that the business has doubled its total cash return since 2013 and is expected to grow this amount by another 10% in FY20. Forget the sky-high yielders elsewhere in the market — this is what should get dividend hunters salivating.

The post Looking for dividends? I think these secret small-cap stocks look great value appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Vitec Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Now, it needs to be said that the company is facing down a steady and probably irreversible decline in the volume of tobacco products it sells globally. Although some emerging markets are smoking more and alternative nicotine delivery products such as ‘vaping’ are increasingly popular, volumes are inextricably falling in major markets and caused Imperial’s volumes shipped in H1 2017 to fall 5.7% year-on-year (y/y).

However, this doesn’t mean the company isn’t growing earnings. In the same period adjusted earnings per share rose 6.3% y/y to 121.9p thanks to the weak pound, an ambitious cost-cutting drive and focus on maximising margins and cash flow in key markets like the US, where margins rose 4.2% y/y in the half.

Rising earnings are critical to supporting the company’s policy to increase dividend payments by 10% annually. Interim dividends rose by the target amount this year to 51.7p and mean the company is on track to meet expectations of a full-year payout of around 171p.

For this policy to be sustainable over the long term the company will need to continue finding success in its plan to rationalise the number of brands it sells, invest wisely in growing these core offerings, and renew focus on more profitable markets to increase cash flow and reduce the £13.9bn pile of net debt on the books.  There’s no guarantee this plan will work but with its shares priced at just 12.2 times forward earnings while offering a very nice dividend there’s a large margin of safety for investors interested in Imperial Brands.

Off to the races

Another stock that’s traditionally appealed to both income and growth investors is £400m market cap camera accessory maker Vitec (LSE: VTC). After rising over 65% in value over the past year the company’s stock now only yields 2.8% but with earnings rising rapidly there’s plenty of reason to expect dividends to continue growing for some time to come.

By designing, manufacturing and distributing products such as camera mounts, lighting solutions and lenses, Vitec’s premium brands are benefitting from the global boom in content creation by providing the accessories necessary for high quality filming and photography. Overall market growth, together with a concerted push into Asia, is paying off big time for the business as continuing sales in H1 rose 14.5% y/y to £164.9m, while operating profits jumped up from £13.1m to £18.3m.  

Management is also whittling down the brands its owns to focus on its core photography and broadcast markets that offer higher margins and are growing more quickly. Increased profits from these core divisions and the proceeds of disposals led to statutory earnings per share rising from 17.1p to 32p y/y, which provided the basis for increasing interim dividends by 5.1% to 10.4p. The company’s dividend yield isn’t amazing right now but with sales and earnings rising rapidly, low debt and an attractive valuation of 14.6 times forward earnings I see plenty of reason to like Vitec.

The post Why this FTSE 100 stock will satisfy both growth and income investors appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Soaring returns

Supported by steady US economic growth, I believe business jet specialists BBA Aviation (LSE: BBA) should deliver sterling returns in the years ahead.

Investors should be buoyed by the improving momentum of BBA Aviation’s Signature flight support arm, the world’s largest fixed base operation (or FBO) network. The division is responsible for around four-fifths of group profits.

With the $2.07bn acquisition of Landmark Aviation in September also boosting the firm’s long-term earnings outlook, BBA Aviation is predicted to shell out generous dividends of 12.7 US cents and 13.3 cents per share in 2016 and 2017 respectively. These figures yield a chunky 4.4% and 4.7%.

Build a fortune

Despite weakness in its UK construction arm, I reckon the diversified nature of Interserve’s (LSE: IRV) operations should keep dividends chugging higher. The business saw pre-tax profit leap 28% to £79.5m last year as its British Support Services and International Construction arms kept delivering the goods.

And investors should take heart from Interserve’s terrific relationship with blue-chip clients across the globe — the company inked key contracts with London Underground, B&Q, Superdrug and the Dubai Aviation City Corporation last year, for example.

Against this backdrop the City expects Interserve to raise the dividend to 25.3p per share in 2016, yielding a spectacular 5.7%. And the yield moves to 5.9% for next year thanks to a predicted 26.5p reward.

Camera corker

Signs of improvement in the broadcasting space looks set to support chunky dividends at camera and equipment specialists Vitec Group (LSE: VTC) looking ahead.

Industry data suggests that heavy demand declines for lens cameras is starting to moderate, while a string of major events in 2016 — from the Rio Olympic Games and European Football Championships through to the US Presidential election — should deliver solid revenues expansion in the near-term.

And for the coming years, a steady stream of new product launches — combined with Vitec’s massive restructuring drive — should undergird stunning earnings growth.

For 2016 the ‘Square Mile’ expects Vitec to lift the dividend to 26.3p per share, yielding a market-bashing 4.4%. And a projected 26.6p payout for 2017 will keep the yield at a market-smashing level.

Suits you

Tux renter and suit retailer Moss Bros Group (LSE: MOSB) has seen sales explode in recent times, its extensive store refit programme and brand investment paying off handsomely.

Meanwhile, improvements to the company’s online proposition is also promising to deliver plump rewards in this critical growth market. Moss Bros saw total internet sales gallop almost a third higher in the year to early January, making the online division responsible for 10% of group sales.

The City expects Moss Bros to fork out a dividend of 5.7p per share for the period ending January 2017, yielding an eye-watering 5.7%. And a yield of 5.9% is in place for 2018 thanks to predictions of a 5.9p dividend.

The post 4 Hidden Dividend Stars! BBA Aviation plc, Interserve plc, Vitec Group plc & Moss Bros Group plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.