Dividends paid by companies quoted on the Alternative Investment Market (AIM) are set to pass the £1 billion mark this year - and that’s promising news for investors looking for some all-cap income diversification.
The milestone comes as payout growth from AIM stocks tripled between 2012 and 2018. Dividends grew by an average of 15 percent every year once you adjust for new issues and de-listings.
Despite the growth from AIM stocks, dividends in the Main Market still make up the vast bulk of overall payouts, although growth is understandably lower at 4.9 percent. In fact, overall dividends from equities are forecast to come in at £97.8 billion in 2018, but there is a huge dependency on the top 15 company payers. Last year, the top 15 accounted for three fifths of all UK dividends. The top five accounted for nearly two-fifths.
A maturing market
Across nearly 1,000 quoted companies, the yield on AIM stands at 1.2 percent. That’s some way off the 3.9 percent average on the Main Market. But bear in mind that only about a third of AIM firms pay a dividend (compared to four-fifths on the Main Market). When you strip out AIM firms that don’t make payouts, the yield rises to 2.1 percent.
Analysis by Link Asset Services suggests the improving picture for AIM dividends is down to both the increasing maturity of quoted firms and the larger size of new companies coming to the market. Over the past five years, the market cap of the average AIM IPO was £20 million, which was up from £12 million in the five years previous.
Interestingly, AIM dividends also offer less concentration and broader sector diversification than the Main Market. In particular, they have a greater focus on industrials and IT, and less dependence on oil companies.
Screening for AIM dividends
This year it’s expected that the total dividend payout from AIM firms will reach £1.16bn. But how can you begin filtering the market for the strongest, safest yields? This week, we’ve taken a look at the highest rolling yields available on the market, adding in a few safety nets along the way.
To start with, the search focuses on companies whose dividend payments are covered by earnings (dividend cover) by at least 1.2 times. I wanted to see at least two years of dividend growth from each stock. Plus the rules also require each company to rank in the top 25 percent of the market based on Stockopedia’s scoring of their overall quality, value and momentum. Real estate investment stocks are excluded and I’ve also included the StockRank Style classification for each.
These measures are a starting point in helping to weed out expensive laggards and potential dividend traps (or dividend cuts) - although further investigation is always important.
The results - as the latest research suggests - produces a diverse range of firms on yields well above the average 2.1 percent forecast. Leading the list is online financial trading platform Plus500 (LON:PLUSP) with a yield of 10.1 percent. Others in the top five include the building products manufacturer Epwin (LON:EPWN), Russia-based mining group Highland Gold (LON:HGM), discount shoe retailer Shoe Zone (LON:SHOE) and the gift voucher and prepaid gift card company Park (LON:PRKG).
The second half of the list - with yields of just over 4 percent - include some better known investor favourites with generally longer dividend payout streaks. They include touch sensor technology firm Zytronic (LON:ZYT), concrete floor levelling specialist Somero (LON:SOM), Telford Homes (LON:TELF), law group Gateley (LON:GTLY) and children’s toy company Character (LON:CCT).
Exceptionally high yields tend to catch the eye, but they can be a warning that the city has lost faith in the companies behind them. With smaller and potentially more vulnerable AIM-quoted companies it’s vital to take this risk seriously. So adding safety filters like dividend cover, dividend growth streaks and the overall investment appeal of the stock may help avoid the worst dividend cuts and put you on the path to finding a new world of dividend paying stocks.
Disclaimer: This content should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.