10 AIM shares for dividend growth investors

Dividend payouts from AIM stocks have tripled, and this may be the chance to buy income on the cheap.

Dividends paid out by companies quoted on the Alternative Investment Market (AIM) rose by nearly a quarter to £633 million in the first half of 2019. At the current run rate, the overall dividend payout from AIM stocks has tripled since 2012.

For investors, the eye-catching appeal of AIM is the possibility of finding high growth stocks that come with attractive tax benefits. But with nearly 900 companies on the market, what do the latest figures really say about AIM dividends, and what should an income investor be looking for?

Dividend data in 2019

According to research by Link Asset Services, the growth in payouts from AIM shares in the first half of 2019 was bolstered by unusually large special dividends. Strip them out though, and the underlying payout still came in at £571 million. That’s 13.9% higher than the first half of 2018.  A little under half of the increase was derived from new company listings.

Last year, the overall dividend payout from AIM stocks crossed the £1 billion marker for the first time (coming in at £1,116 million) and Link believes 2019 is set for another record full-year total.

In terms of large-paying sectors, the fastest underlying dividend growth in 2019 has come from healthcare, financials, and industrial goods and support companies. Retail, on the other hand, saw payouts fall, largely because Conviviality went bust, while payouts also fell in the building materials & construction sector.

Expectations for the year ahead

Looking ahead, the forecast dividend yield for the whole of AIM currently stands at 1.5%. But when you exclude non-dividend paying stocks, the yield rises to 2.5%. As Link points out, that's only a little way behind the 3.1% from the mid-caps on the main market, although some way off the 4.5% yield from the FTSE 100. Overall, the payout forecast stands at £1,304 million in 2019, up 16.8% in headline terms on what we saw in 2018.

For investors, these dividend expectations are fairly upbeat considering that the main AIM All Share index fell sharply last autumn and has been flat for much of 2019. The lack of a rally in smaller stocks - which we've also seen in the FTSE SmallCap index - perhaps reflects the risk-off nature of investors uncertain about how issues like Brexit might affect smaller firms.

Arguably, an economic slowdown could hit the dividend paying capabilities of smaller AIM companies. But if the outcome ends up being positive (or less worse than the market is perhaps pricing in) there could be an argument to say AIM income stocks are cheap. Only time will tell.

In the meantime, here's a list of stocks currently passing some of the classic dividend checks used by income hunters. The rules here look for:

• A forward yield of more than 3%
• Dividend cover of more than 1.2x
• Positive forecast dividend growth
• Positive relative price strength (6 months)
• A market cap of more than £20 million
• The list is sorted by dividend growth streak (number of years of dividend growth)

Source: Stockopedia

As the UK's market for growth companies, AIM is popular with individual investors, but it hasn't traditionally been a source of ideas for income hunters. Smaller stocks with vulnerable cashflows don't often appeal to investors looking for solid, dependable companies that are well financed and capable of sustaining their dividends. Yet, the evidence shows that AIM is in fact becoming an increasingly attractive source of payouts.

The yields here range from 3.2% at healthcare provider CareTech (LSE:CTH) to 5.5% at the investment firm Jarvis Securities (LSE:JIM). Caretech and Murgitroyd (LSE:MUR), an IP and trademarking specialist, have the strongest track records, with dividend growth streaks of nine years-plus.

It's reasonable to say that the big dividend payers of the FTSE 350 will always be the main hunting ground for dividend investors, but AIM could offer some interesting alternative options. As a market that is highly sensitive to sentiment, it may offer the chance to buy income on the cheap when uncertainty reigns. 

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