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Chelverton's top six small cap divi stocks

David Taylor, co-manager of the Chelverton UK Equity Income fund, names the select half dozen dividend paying stocks that have powered him to second in his peer group over the last year.

Galliford Try

‘As a house builder you want to be geared to the south, and if you are a contractor, you want exposure to the utilities sector. That is exactly where Galliford is positioned, with a strong book of contracting business and the vast majority of housing land needed for the next two years already in place. Importantly, the directors took the decision a number of years ago to focus on increasing profits and return on capital and not just chasing housing volumes and construction turnover. We are now reaping the rewards as income investors as the dividend has grown over 80% in the last year, which in turn has driven a rerating of the shares. The outlook remains positive and the shares yield more than 5% on current forecasts.’

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Braemar Shipping

‘As an income manager we don’t mind being ‘paid to wait’ occasionally, and this is the case with Braemar at the moment. We are currently being paid an annual dividend equivalent to a yield of over 6.5% from a company with substantial cash on its balance sheet but where the timing of recovery in the underlying ship broking business is still some way off. The issue is that whilst transaction volumes are reasonable, rates are weak due to excess shipping capacity. In the meantime however, the group has successfully diversified into logistics, environmental and technical areas such as warranty surveys and loss adjusting to keep the cash rolling in, until such time as rates start to pick up.’

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Dairy Crest

‘It supplies milk to the doorstep and major multiples, has around a fifth of the UK butter and spreads markets and owns leading cheese and flavoured milk brands. Having just sold its French business and largely de-geared its balance sheet, analysts have been debating what company Dairy Crest will now go and buy. However, with vendor expectations still largely too high and with the stock market still rewarding strong balance sheets, we suggest that the directors may decide to continue as they are and generate growth by enacting various low risk ‘self-help’ investments and continuing to support their portfolio of brands. This is a cash generative business with a current yield of just under 6%.’

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Menzies

‘It has a great mix of two independent uncorrelated cash generative businesses under one umbrella. And that is what we have in Menzies with its newspaper and magazine distribution business - one of two in the UK - and its aviation service business. Cost control is the key to the resilience of the distribution business and within aviation, whilst cargo remains cyclical, the group has grown throughout the downturn in ground handling as it has aligned itself with high quality airlines and taken market share. Current estimates indicate a 4.5% dividend yield.’

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Wilmington

‘The company is an online B2B publisher, with products in areas such as accounting and pensions, and a professional education and training business. On the publishing side, the last few years have seen the company migrating its publishing assets away from print to online, to the point where at the last set of results three quarters of this division was digital. At the same time the training business had to shift away from a reliance on conveyancing, before the downturn, to a more broadly-based business, with compliance proving to be a growth area. The stock is now well placed to benefit from an upturn in business confidence and has a current yield of just over 5%.’

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St Ives

‘If you asked many City folk what St Ives did they would probably reply it’s an ‘old-fashioned’ printing business. It was, but not anymore, as under the new management team the old commoditised printing businesses have either been sold off or closed down. The book printing business remains and is benefiting from gaining market share. A combination of acquisitions and organic investment has substantially grown the marketing services turnover over the past couple of years to the point where analysts suggest a contribution of up to 30% of EBIT in the coming year may be achieved by these newer value added revenue streams. After a good set of results recently, estimates suggest the shares are trading on a P/E of under 7 and a yield of around 6%.’

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