Are these stocks Britain’s best-kept dividend secrets?

Royston Wild looks at two London small-caps with stunning dividend potential.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Debt purchaser and manager Arrow Global Group (LSE: ARW) has enjoyed a stratospheric price ascent in recent times, the stock recording a 42% rise during the past three months alone and punching fresh record tops in the process.

But despite this fizz higher, I believe Arrow Global still provides plenty of bang for dividend chasers’ buck. A projected 9.1p per share payment for 2016, up from 7.1p last year, creates a chunky-if-unspectacular 3.3% yield. And the yield leaps to 4% for next year thanks to an estimated 11p reward.

And I expect payouts to keep growing at an exceptional rate as the bottom line swells. Indeed, the City expects earnings to detonate 30% and 27% in 2016 and 2017 alone.

These medium-term dividend forecasts are well covered too. This year’s potential reward is covered 2.9 times by expected earnings, while 2017’s dividend is covered three times, both clearly some way ahead of the widely-regarded safety benchmark of two times.

Arrow Global could be a beneficiary of a possible downturn in the British economy should bad loan levels rise, a scenario that may also provide fresh debt purchasing opportunities for the firm.

And I expect the financial specialist’s ongoing European expansion to fuel shareholder returns too — last month the business expanded its presence in the Netherlands by purchasing the real estate financing activities of Rabobank’s RNHB Hypotheekbank along with CarVal Investors.

On the up

Improving momentum across its main businesses also makes me optimistic about the dividend outlook for Stobart Group (LSE: STOB) this year and beyond.

Stobart has long kept the dividend locked at 6p per share. But the abacus bashers expect the business to light a fire under the payouts from this year, and have forecast rewards of 11p and 12p for the periods to February 2017 and 2018 respectively. These figures yield a spectacular 6.5% and 7.1%, smashing the blue chip forward average of 3.5%.

Many investors will be concerned by a lack of dividend coverage — indeed, 2017’s projected payment dwarfs expected earnings of 5.8p per share. And next year’s dividend outstrips anticipated earnings of 6.5p.

However, Stobart’s ongoing divestment scheme should calm investors concerned about these projections, in my opinion. The company raised £37m in cash through the sale of its Speke property site in May and said last month that “we anticipate further disposals in line with our plan in the second half.”

Meanwhile. Stobart’s much-improved profits outlook should keep payouts firing well beyond next year. The company’s Energy division has already booked enough contracts to enable it to meet its goal of supplying 2m tonnes worth of biomass by 2018.

And with business also bubbling nicely at Infrastructure and Rail — and its Aviation division locked in “advanced talks” with low-cost carriers and full service operators concerning London Southend airport — I reckon Stobart is an exciting stock for growth and income investors alike.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

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

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »