Dividend diamonds and a recovery for UK growth stocks

The “dividend diamonds” Cranswick (LSE:CWK) and Brickability Group Ordinary Shares (LSE:BRCK) were today highlighted in a report championing the lesser-known income qualities of smaller and mid-cap companies.

Octopus Investments points out that a potential FTSE Small Cap yield of 4.33% will outstrip the 3.97% of the FTSE 100 index in 2025, alongside the benefit of higher dividend cover.

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In the 10 years to 2025, it adds that overall cash payments are expected to have increased by 17.33% for the FTSE 100 whereas FTSE AIM has increased by a more attractive 68.4%.

The investment manager also flags diversification benefits as the FTSE 100 remains the most concentrated dividend index based on the top 10 payers accounting for 56% of the total.

This leaves income investors materially exposed to the future dividend performance of a relatively narrow list of holdings, compared to 37% of the top 10 payers for AIM, 33% for FTSE Small Cap and only 22% for FTSE 250.

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It ranks the largest dividend payers on AIM as Serica Energy (LSE:SQZ), Greencoat Renewables (LSE:GRP) and Marlowe (LSE:MRL), with the best in the FTSE Small-Cap being Regional REIT, Liontrust Asset Management (LSE:LIO) and Chesnara (LSE:CSN).

Octopus regards FTSE 250-listed food producer Cranswick and AIM housing industry supplier Brickability as examples of the potential “dividend diamonds” residing within the smaller UK markets. Both companies are currently held in its portfolio.

Cranswick has delivered 34 years of unbroken dividend growth with a forecast yield for the current year of about 2%. Brickability has shown significant dividend progression since listing in 2019, as well as resilience in the face of recent housing market challenges.

At current levels, the group is trading on a price/earnings multiple of under eight times and with a forecast dividend yield of over 5%.

Octopus believes there’s a “once-in-a-cycle” opportunity for investors to consider allocating to UK growth equities.

Its bi-annual Dividend Barometer shows that the FTSE AIM Index and the Deutsche Numis UK Smaller Companies are both due to deliver around 22% compound annual earnings growth.

This percentage is very similar to the Nasdaq Composite, yet they trade on very different earnings multiples.

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FTSE AIM is on an earnings multiple of 13 times and UK Smaller Companies on 10.8 times, whereas their US peer the Nasdaq Composite Index is on a lofty 23.9x multiple.

Chris McVey, deputy head of the Octopus Quoted Companies, said: “Following the market bottom in October 2023, signs of recovery are emerging for UK growth equities.”

This is due to an inflection in interest and inflation rates and the unexpected resilience of the UK economy.

McVey added: “So, while the recovery is in its infancy, the opportunity for investors is ripe.

“Looking beyond the largest UK equity dividend stalwarts highlights smaller growth companies that have the potential to generate significant capital growth with attractive track records of paying consistent, and growing dividends.”

Investing in smaller companies is higher risk as shares can rise and fall more quickly than those listed on the main market of the London Stock Exchange.