Five high yield small caps

Bearing this in mind, we're trawling the FTSE All-Small and Aim All-Share this week for the UK's best small-cap dividend plays. We've screened for several factors to test not only the overall level of yield, but also its sustainability and potential for future growth. Our screening criteria are as follows:

■ A dividend yield of 4 per cent or more - this is above average and roughly represents the top third of all dividend-paying stocks we looked at.

■ Three-year dividend compound annual growth rate (CAGR) of 5 per cent or more.

■ Three-year EPS CAGR of 5 per cent or more.

■ Forecast EPS growth of 5 per cent or more.

■ Positive EPS in each of the past three years.

■ Dividend cover of at least 1.5 times.

■ Interest cover of at least five times or net cash.

■ Positive free cash flow.

Only five stocks passed all of our tests and we present them in order of dividend yield below. For readers that want to do more hunting around, we've also included a table of the small-cap stocks that passed the key 4 per cent dividend yield test but fail on one of the supplementary tests.

Smiths News

Smiths News (NWS) has performed stunningly since we recommended it as our income tip of the year for 2012 - rising 95 per cent from the 78p tip price. This excellent performance means the eye-popping 11 per cent 2012 yield has slimmed down substantially, yet the stock is still the highest yielding of all those selected by our screen. Negative sentiment towards Smiths is based on the fact that its core business is in a declining industry: newspaper and magazine distribution. But these operations are being bolstered by cost savings, are supported by long-term contracts and are generating good amounts of cash. Indeed, cash flow is being used to fund investment in new areas with a target of taking non-news profits to half of the total by 2016. Broker N+1 Singer forecasts a hearty 8 per cent dividend increase this year to 9.3p followed by a similar rise to 10p in 2014, giving a yield of 6.1 per cent rising to 6.8 per cent. Last IC view: Buy, 140p, 16 Oct 2012.

Source: S&P CapitalIQ

Abbey Protection

While the economic environment is not helping Abbey Protection (ABB), the group is focused on one of the UK's structural growth markets - helping smaller businesses deal with an ever-growing regulatory burden which is estimated by government to cost about £11bn a year. Abbey provides insurance to cover smaller businesses from the cost of legal disputes and HMRC investigations. The company has also developed a consultancy arm to advise clients that have become embroiled in disputes. Recently, strong growth in consultancy has helped support overall growth as tough economic conditions make insurance products a harder sell. Despite the headwinds, insurance client retention was good in the first half, which underlines the value placed on Abbey's niche products. Broker Numis predicts a 5 per cent dividend rise this year to 4.6p, giving a yield of 4.8 per cent. Last IC view: na.

Costain

There is no denying that the construction market is tough at the moment, but the sector looks like a promising hunting ground for contrarian income hunters (see our recent sector focus: 'Constructing high-yield recovery plays'). Part of the reason for optimism is that UK-listed construction companies have responded to the torrid conditions by moving into new areas. In Costain's (COST) case, this has meant developing a one-stop-shop service which provides project planning and maintenance as well as construction itself. This strategic shift is supporting the group's order book and bid pipeline and there are hopes that the construction market as a whole has now troughed. As well as the attractive dividend, the company has a whopping great cash pile. Broker Investec forecast a 7 per cent rise in the dividend both this year and next to 10.7p followed by 11.4p, giving an expected yield of 4.6 per cent rising to 4.9 per cent. Last IC view: Buy, 228p, 30 Aug 2012.

Creston

Marketing company Creston (CRE) is hoping this year will see a recovery in its fortunes. Last year, the company was hit by disappointment over new ventures as well as tough trading conditions in a number of its markets. But the group's focus on digital marketing provides promise and there haven't been any setbacks so far in the current financial year. Indeed, analysts are hoping the company is now back on a firm footing and well positioned to win work despite the tough backdrop. Attractive dividend growth is also forecast, with Investec expecting the payout to increase 5 per cent this year to 3.5p and then grow a further 8 per cent in 2014 to 3.7p, giving respective yields for this year and next of 4.2 per cent and 4.4 per cent. Last IC view: Hold, 48p, 30 Jan 2012

Hogg Robinson

Shares in business travel company Hogg Robinson (HRG) are down more than 30 per cent from their spring highs due to a mix of poor trading news and economic fears. The weakness of the euro will also be a drag on performance. Despite a disappointing first-quarter trading performance, analysts are still expecting decent growth in the year which will be helped by comparisons with a weak second-half trading period last year, recent new client wins and the company's record of margin improvement. Research house Edison is also forecasting generous dividend hikes from the company with 25 per cent growth pencilled in for the current year, giving a 2.3p payout rising to 2.6p the following year. That represents a yield of 4.6 per cent rising to 5.3 per cent. Of course, the stock is cyclical and vulnerable to business uncertainty. Last IC view: Buy, 65p, 23 May 2012

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