These three small caps pay big dividends

Thorn Group, LogiCamms and Collins Foods offer high dividends and the potential for growth.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published August 14, 2013 7:39 am AEST

The past year has seen high-yielding stocks outperform almost all others, as low fixed interest and bond rates have forced investors into riskier assets in the hunt for income. The share price of high yielding, large-cap stocks such as the big four banks and Telstra have risen sharply, while smaller cap stocks offering similar yields have yet receive the same attention from investors.

For investors willing to take on more risk, some small cap stocks offer both high dividend yields and a strongly growing business. Three such small-cap stocks are Thorn Group (ASX: TGA), LogiCamms (ASX: LCM) and Collins Foods (ASX: CKF).

Thorn Group's share price has risen by around 35% in the past 12 months, and currently yields around 4.5% fully franked having increased its dividend payout by over 20% in FY13. The company operates the Radio Rentals chain and has grown revenue and profit in every year since 2008.

Thorn has managed to successfully negotiate the GFC and has grown the company well in the years since, with the company seemingly able to do well in all economic conditions. Finally, the payout ratio is around 60%, indicating scope for increases in the dividend in the future.

Logicamms is an engineering, project delivery and asset performance service contractor servicing the mining sector. While the company is exposed to slowing mining construction investment, the recent purchase of ITL Engineering, combined with the company's diversified customer base should allow the company to produce solid earnings growth in FY13 and potentially increase its fully franked 6.5% dividend yield.

Finally, Collins Food, owner of the Sizzler and KFC restaurant chains, has a fully franked dividend yield of 5.3% and a current price-to-earnings ratio of around 9. The company has been attempting to turn around the Sizzler chain, which will be a catalyst for share price and dividend growth in coming years. If the company can successfully transform the business and continue the recent success of KFC, it should have scope to increase its dividend in coming years.

Foolish takeaway

Small-cap stocks offer investors the chance to receive the high dividend yields currently difficult to find in larger cap stocks. The three stocks mentioned have the potential to grow profits and dividends in coming years, potentially providing a catalyst for share price growth too.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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