While many UK investors tend to focus primarily on FTSE 100 stocks, I think it’s worth allocating a bit of money to companies outside the Footsie if you’re looking to generate higher returns on your money.
There are plenty of exciting mid-cap and small-cap companies in the UK that are growing quickly, and these kinds of companies can often outperform their larger-scale FTSE 100 peers.
With that in mind, here’s a look at two small-cap dividend stocks that I think have the potential to smash the FTSE 100 over the next five years.
Macfarlane Group
Macfarlane Group (LSE: MACF) is the largest distributor of protective packaging products in the UK, serving over 20,000 businesses across the nation. Packaging may not be the most exciting industry, but don’t let that put you off – sector stocks can still generate excellent returns for investors. For example, since I last covered the company in April 2017, its share price has risen 40% while the FTSE 100 has gone nowhere.
Macfarlane released its annual results for FY2018 this morning and, in my view, the numbers look pretty good. For the full year, turnover rose 11%, and profit before tax increased 17%, representing the ninth consecutive year of profit growth for the group. Furthermore, it also announced a healthy 10% dividend increase and said that despite uncertainty from Brexit, it’s confident it will demonstrate further progress in 2019.
From an investment point of view, I really like the look of Marfarlane right now. The stock trades on a very reasonable valuation (its trailing P/E is 16.3), is growing its dividend, return on equity is solid (averaging 16% over the last five years), and debt is low. Overall, I believe the stock offers a lot of potential and I think it should continue to outperform the FTSE 100 in the years ahead.
Clipper Logistics
Another fast-growing smaller company I believe could beat the FTSE 100 in the coming years is Clipper Logistics (LSE: CLG). It’s an innovative logistics group that counts the likes of ASOS, Sports Direct and John Lewis as customers.
Clipper shares had a fantastic run between 2015 and 2017, rising around 170%. Yet over the last year, the shares have been dumped by investors on the back of Brexit concerns. I think that’s created a fantastic opportunity for value hunters. Trading at around 400p a year ago, the stock can now be purchased for 233p.
Clipper’s recent half-year results in December looked good, with revenue rising 14% and profit before tax jumping 17%. The company also increased its dividend by an impressive 14%, which suggests management is confident about the future (and directors have been loading up on the shares themselves which is another bullish sign).
With the stock currently trading on a forward P/E of 13.9 and offering a prospective dividend yield of more than 4%, I believe now is the right time to buy.