ASX small caps that pay solid dividends, or capital gains?

It’s an age old question for investors, and is usually a mutually exclusive proposition that involves choosing one over another. But with yields and bank deposits pretty much at zero, either way, investors are beginning to look at extracting yield from elsewhere.

And the ASX is not a bad place to start in search of this yield pick-up.

Banks and utility stocks are probably top of mind when you think of dividend stocks, and rightly so. These sectors are mature, and are served by the more established, older companies. Australia’s oldest bank, Westpac (ASX:WBC), the Commonwealth Bank (ASX:CBA), and utility stocks like Telstra (ASX:TLS) are examples of big blue chips that have been churning out dividends for investors year after year.

But due to their size and maturity, you wouldn’t get the upside potential from these companies like you might in smaller caps stocks.

Unfortunately, most small cap stocks don’t pay dividends. And fair enough, as most of them are emerging companies that are either just starting to get off the ground, or those who still need capital to fuel growth.

Newly listed resources, early stage pharmaceutical, or biotech companies are the least likely to pay dividends, as the runway to product launch and subsequent revenues could drag on for years.

For resource companies, it could take more than 10 years to turn a new discovery into a fully operational mine. Same goes for biotech. Most of the biotechs start out by pitching an IPO to fund research and conduct clinical trials. But once they list, it could take years to get a new drug out the door, with all the lengthy regulatory approvals that come with the territory.

It’s not surprising then, that most of the small caps that are actually paying dividends are found in the not-so-exciting corners of the ASX.

10 ASX small caps that have been paying dividends over the years

Here’s the current list:

MCP McPherson's Healthcare 1.42 0.105 7.39%
CAA Capral Aluminium production 7.45 0.45 6.04%
SIQ Smart Group Human resource and fleet 6.87 0.32 4.66%
SHM Shriro Appliances manufacturer 0.9 0.04 4.44%
NCK Nick Scali Retail 10.53 0.4 3.80%
KOV Korvest Industrial manufacturing 4.45 0.15 3.37%
MMS McMillan Shakespeare Human resource and fleet 10.83 0.34 3.14%
ABA Auswide Bank Banking 6.58 0.19 2.89%
SST Steamships Trading Logistics/diversified 9.35 0.23 2.46%
SFC Schaffer Diversified 20.47 0.45 2.20%
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Note that the dividend yield in the table is calculated using the current share price, instead of at the date when the dividend was actually paid.

McPherson’s (ASX:MCP) is the highest paying dividend company in the list. It’s a beauty and healthcare retailer, but what many of you might not know is that the company has longevity and been operating for 160 years, since 1860.

This company has a long history of paying dividends, even as its business was disrupted by the pandemic last year.

Retailer Nick Scali (ASX:NCK) has been paying investors dividends every year since 2010. Its payout ratio is also quite high, around 60 per cent. This means the company has been paying out 60 per cent of its profits to investors.

The retailer has however managed to gain a bit controversy lately, after it refused to repay the $2.5 million JobKeeper subsidy it received, even when revenues had doubled.

Capral (ASX:CAA) is another high dividend payer. The company paid record dividends of 45c in the last financial year. It manufactures aluminium, and revenues are aligned to the once-again booming residential construction market, specifically the detached and low-rise dwelling constructions.  

The company is currently subject to a buyout offer from private equity firm Allegro Capital.

Smart Group (ASX:SIQ) and McMillan Shakespeare (ASX:MMS) operate in the same segment, servicing the vehicle lease market. Both companies have consistently paid dividends over the last few years.

Investors should be aware, however, that both companies’ revenues depend largely on the government’s fringe tax benefit law, which is currently being reviewed.

Auswide Bank (ASX:ABA) is a solid regional Queensland bank with an asset base of over $3 billion. Like its bigger counterparts, the bank has been paying dvidiend for years.

The company has also recently been flirting with digital payments, making Apple Pay available to all its customers.