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Aim's magnificent seven

FEATURE: We've screened Aim looking for companies that are committed to progressive dividend payments and reveal seven of the best for your portfolio
July 1, 2010

Although Aim's reputation is of a growth market, there are a large number of dividend paying companies on it. Of course, not all of them are guaranteed to be able to maintain the payouts and some may find better channels for corporate funds than returning money to shareholders.

We have identified a total of 22 stocks that have dividend yields of 4 per cent-plus, covered at least twice by earnings (see table below). From these we've selected a core of seven Aim dividend stocks which have all the characteristics described above and that look likely to be able to maintain and even grow their dividend payments for some time to come.

We have also ensured that our mini-portfolio is diverse in terms of the sectors represented. Compare this with higher up the value chain where the bigger dividends tend to be concentrated in a small number of sectors. Our basket of stocks, if held over the past year, would have risen by 21 per cent, beating the FTSE 100's 20 per cent gain in that period. At the same time it would have produced a blended yield of 5.3 per cent, forecast to rise to 6.3 per cent in the coming year, illustrating the defensiveness of Aim's dividend payers but also the potential for good capital growth.

Our Aim income portfolio is made up of stocks filtered for their dividend yield, the dividend cover and then their price to earnings (PE) ratio. This means that among our basket of stocks no one stock has dividend cover of less than two times, they all yield 4 per cent or more and none is on a forecast PE ratio of more than 10 times.

Some of the constituents may not be household names or even among the biggest companies on Aim but their income credentials are plain to see. So with income among the mega-caps hampered by the suspension of the BP dividend, it may be time to go fishing in a different pool.

Interior Services

Interior Services was hampered by a slowdown in business when the credit crunch hit. Many of its key customers for its office and retail fit-out services were at the sharp end of the recession. But it has weathered the storm admirably while also expanding its overseas business, a factor that has helped its shares to rise by 24 per cent in the past year. The shares are valued on a PE ratio of just 5.9 times forecast earnings with a forecast yield north of 9 per cent, covered 2.4 times.

The crackdown on public spending could hit Interior's regional businesses where a significant chunk of work is done for the public sector, but the London business and its international operations are seeing a solid pipeline of potential business. The company has £780m worth of contracts in the bag already and in March said its bid pipeline stretched to £2bn.

Solid State

Solid State is a small electronics distributor that specialises in rugged industrial computers and batteries. At its half-year results in December, it registered an improvement to its previous year's performance in terms of turnover but recessionary pressures resulted in a small decrease in margins as customers bargained hard and the decline in sterling hit overseas sales.

Solid State followed this up with a small acquisition in April which added further rugged industrial computing products to its portfolio. The company also reported continued improvement in the final quarter of its financial year to March which would result in the second half showing an improvement in performance over the first. Solid State also paid out a 1p half-year dividend which augurs well for the full-year payout of a further 2p being made – this expectation is also backed up by the fact that management own around 70 per cent of its shares which means they would be major beneficiaries of any dividend payout.

Solid State, whose shares have risen by 38 per cent in the past year, is forecast to pay out a 7 per cent dividend yield which is covered 2.2 times by earnings. It is also trading on a forward PE ratio of nine.

Lincat

Lincat is forecast to pay a 5.7 per cent dividend yield in the current financial year covered 2.1 times by earnings. The company is also reasonably valued with a PE ratio of 8.7 times forecast earnings. Lincat has had a busy period over the past 18 months, tidying up its portfolio of companies which manufacture commercial catering equipment and bar furniture. It sold its Mercury division, which made cookers for the domestic market, and has also sold some freehold property that was no longer required. This allowed it to pay off a loan that was taken out to fund a one-off £13m tender offer in mid-2007, so the company started 2010 with a positive cash balance of £5.1m compared with net debt of £3m the previous year.

Revenues were down marginally in 2009 as weak end markets hampered progress, but Lincat still increased its dividend payment by 3.4 per cent to 30p. Management admitted they are wary of public spending cuts which may affect Lincat's performance – 15 per cent of its business is with the public sector. They are actively considering spending some of the cash balance on acquisitions to bulk up the business.

NWF

NWF is often described as an 'old economy' business, as it is a provider of logistics services and a seller of animal feeds and fuel. But in recent years it has invested heavily in state-of-the-art logistics warehouses from where it serves major supermarket chains with its next-day delivery capability for staple products. That investment means it is now well placed to weather the current economic uncertainties. In the six months to November, a record operating performance from the distribution business helped to offset weaker performance in animal feeds and fuels.

This resilient performance has also resulted in net debt reducing sharply as the warehousing investment begins to justify itself and the company has been able to maintain a solid dividend payment which is forecast to yield 5.3 per cent in the full year. The diversified income streams NWF enjoys give it an element of defensiveness which should give confidence that it will continue with its generous dividend payout.

Staffline

Staffline's recruitment services business focuses on providing blue-collar workers for the food packaging industry. In this low-margin sector, any cost savings are welcome so Staffline's 'OnSite' model, in which the company takes over its customer's entire human resources operation to run it more efficiently, has proved popular. And while the economic outlook remains uncertain, Staffline is benefiting by providing temporary labour where employers are unsure about committing to permanent appointments.

At its last trading update, Staffline said it expected full-year earnings to be significantly ahead of expectations. The company has also been picking up smaller recruitment operators in a bid to diversify its revenue streams. With a forecast dividend yield of 4.6 per cent, which is covered almost four times by earnings, Staffline should be able to continue to reward investors with cash returns. Meanwhile its share price, which was hit hard when the economy lurched into recession, has bounced back strongly, rising by 94 per cent in the past year, but still remains valued at just 5.6 times next year's forecast earnings.

Stanley Gibbons

Philately specialist Stanley Gibbons has forged itself a strong niche based on its long history of serving stamp collectors from around the globe. And in recent years the company has branched out into providing investors with specialist investment funds that invest in stamps. The scarcity value of some stamps means that investments in this area in recent years have proved to be exceptionally successful, which has helped to drive demand for exposure from investors who may have had their fingers burnt elsewhere.

Such alternative assets will always remain niche, but Stanley Gibbons is leveraging its expertise to create a solid growing business. In April the company reported like-for-like sales growth of 15 per cent compared with the previous half year, and enquiries for its investment products were running ahead of the previous year. Gibbons is forecast to pay a dividend yield of 4.6 per cent, covered almost three times, and is rated at less than eight times its forecast earnings.

First Property

Aim's property companies have suffered a roller-coaster ride in recent years but First Property's shrewd management team has ensured that its path has been much more smooth. A clever move into Polish commercial property five years ago was timed almost to perfection as Poland proved to be a happy hunting ground in the early years and a resilient market throughout the downturn. Such has been the success of the Polish venture that First Property is planning the launch of a new Polish property fund in the coming weeks.

But the twist to the tale comes from a decision to raise £106m in February to return to the UK commercial property market, just as it promises to emerge from a vicious downturn. This offers potential upside to come if First Property's management team can repeat its previous successes in the UK market as well as continuing to benefit from its strong position in Poland. The shares are forecast to pay out a dividend yield of 7 per cent, covered almost three times, and First Property's solid and dependable revenue streams should make this a fairly secure bet.

Aim companies offering dividend yields of at least 4 per cent

NameSectorPrice (p)Market value (£m)1-yr change (%)Historical dividend yield (%)Forecast dividend yield (%)Dividend cover (x)Historic PE (x)Forecast PE (x)
Ashley HouseConstruction & material3720.59-53.7513.5115.022.23.410.1
GVCTravel & leisure13040.48-16.1313.4914.852.43.15.2
Cyril SweettSupport services25.514.9429.0210.222.54.56.1
Interior ServicesSupport services166.555.2115.228.29.172.455.9
ILXSupport services21.55.07-30.656.987.752.85.25.5
SavileSupport services33.54.9-2.96.727.462.75.55.6
Solid State Electronic & electrical equipment47.52.9237.686.327.022.27.29.3
MorsonSupport services10045.34-9.566.673.15.47.6
AdventisMedia157.12-41.755.955.292.86.14.5
LincatIndustrial engineering5853236.055.135.72.19.38.7
Total Produce (Lon)Food & drug retailers29.75104.69-5.5565.136.573.85.14.8
Begbies TraynorSupport services6053.69-42.314.835.372.97.27.9
Cropper (James)Forestry & paper129.510.9715.114.795.322.68.17.9
NWFSupport services8740.8-1.144.715.32.68.29.8
MaintelSupport services153.516.5338.294.695.212.58.78.4
ACM ShippingIndustrial transport187.533.171.354.675.1945.47.1
THBNon-life insurance55.518.33-26.974.55.0145.6
First PropertyReal estate16.2517.8404.437.042.97.98.1
MBLMedia14024.2115.234.294.786.43.63.8
Albemarle & BondFinancial services223.75124.168.884.134.562.88.89.2
StafflineSupport services7515.9270.454.134.563.76.55.6
Stanley GibbonsGeneral retailers12330.972.074.074.572.98.47.9

Source: Thomson Datastream