Small-cap stocks listed on the London Stock Exchange often get overlooked by investors searching for income. Perhaps that’s understandable, as established blue-chip names like Lloyds and Vodafone normally hog the limelight.
Moreover, there’s often an assumption that smaller enterprises don’t have the financial clout to support rising payouts. While that may broadly be true and payouts aren’t guaranteed, there are some quality small-caps that offer potentially attractive income streams.
Here, I’ll highlight two of them that are worth considering.
Surging bullion prices
The first is Ramsdens (LSE: RFX), which has a market-cap of £76m. The firm operates 169 stores and specialises in pawnbroking loans, jewellery retail, foreign currency exchange, and the purchase of precious metals.
The stock’s almost doubled in five years, and jumped nearly 10% on 8 April. This came after the firm raised its profit outlook for the full year, driven by the surging gold price.
Pre-tax profit’s expected to be at least £13m, higher than the £12m previously expected by analysts. In its last fiscal year (which ended in September), Ramsdens’ pre-tax profit was £11.4m on revenue of £95.6m.
Gross profit in its precious metals segment increased 50% year on year in H1. This was driven by the rising gold price, coupled with a 5% increase in the weight of gold purchased. To take advantage of this trend, the firm launched a dedicated gold-buying website last month.
Meanwhile, gross profit at its pawnbroking and jewellery retail businesses increased by 10% and 15%, respectively. Foreign currency gross profit was flat though, partly because the Easter holiday period is later this year. But Ramsdens says its multi-currency card is performing well and an international money transfer service is now live.
Risks here include a sharp decline in gold prices or a spike in inflation. While the latter might boost its pawnbroking and precious metals businesses, less disposable income could also impact demand for jewellery and holidays (currency exchange services).
Rising profits obviously bode well for dividends though. The dividend yield for the current year is a respectable 5.5%, with the payout comfortably covered 2.3 times by prospective earnings.
Finally, the valuation looks attractive. The forward price-to-earnings ratio is just 8, which isn’t high for a consistently profitable company with a strong balance sheet.
Building income through bricks
Next is Michelmersh Brick (LSE:MBH), a penny stock with an £89m market-cap. The company makes over 125m clay bricks and pavers each year. It also owns a number of premium brick brands, which tend to have higher margins.
At 95p, the share price is down 35% over the past four years, largely due to higher interest rates putting pressure on UK housebuilding. The risk here is that this weakness persists longer than expected.
Taking a longer view however, the brick maker’s prospects appear bright. The government had pledged to build 1.3m homes by 2029 to ease the chronic housing shortage, while the Office for National Statistics projects that net migration will average 340,000 a year from 2028.
These are very supportive trends for housebuilding (and therefore bricks). Michelmersh says that positive momentum in its order intake from 2024 continued into Q1 of this year, leaving it well positioned for a market recovery.
The well-supported forward dividend yield is around 5%.
This post was originally published on Motley Fool
