Seven high-yield small-caps

The 13 stocks from last year's screen produced a 15.7 per cent total return compared with 9.3 per cent from the FTSE Small Cap index and 10.4 per cent from the Aim All-Share. While the overall return has been good, some of the large losses racked up by individual shares do support the view of blue-chip devotees that high-yielding small-caps come with a fair degree of risk (see table).

2015 performance

Source: Thomson Datastream

But while small-caps can be volatile, the tangible value of a regular dividend does provide share price support, so long as the payout can be sustained. This screen looks for small-caps with a number of characteristics that suggest a high dividend yield is sustainable. That said, the screening criteria are not overly exacting and many of the stocks highlighted by this screen have their own issues (see the write-ups below for some tasters). Nevertheless, this approach has done well since 2012, producing a cumulative return of 128 per cent, compared with 69.1 per cent from the Small Cap index and 23.5 per cent from the Alternative Investment Market (Aim). Adding in a 2.5 per cent annual charge to account for the large dealing costs often associated with smaller companies, the total return drops to 106 per cent.

High yield small caps vs index

Given the high costs associated with dealing small-caps and the screen's aim of finding dividends that look sustainable, it is encouraging to note that the screen to date looks pretty good on a buy-and-hold basis, too. In fact, the 142 per cent total return from the original 2012 screen is superior to the cumulative return of switching between portfolios from one year to the next.

Buy-and-hold returns

Source: Thomson Datastream

The screen's criteria are as follows:

In recent years I've had to relax the high-yield small-caps screen criteria to get a decent number of results, by allowing shares to fail one of the tests as long as it is not the high-yield test. This year there are seven stocks that pass all the criteria. But I am also including a separate table of stocks that pass the weakened criteria both for the reason that it has done well in the past and because this type of strategy benefits from diversity due to the volatility discussed earlier.

Some of the stocks in the tables only pass the screen's yield test due to special dividend payments and where this is the case it is noted. I've provided write-ups of three of the stocks passing all the screening criteria below based on the highest-yielder, the stock trading on the lowest forecast earnings multiple and the stock showing the best three-month momentum. They're a rather rum bunch.

HIGH-YIELD SMALL-CAPS

Full marks

*Includes special dividend

Nearly there

*Includes special dividend

Source: S&P Capital IQ

HIGHEST YIELD