Five AIM income shares for your ISA

We pick a basket of AIM stocks with dividends set to grow substantially.

This week, I am writing about potential ISA investments that provide attractive, and preferably growing, levels of income for investors. The past year makes it more complicated, because some companies have stopped paying or cut their dividend, albeit on a temporary basis.

Here are five AIM companies that provide yields that are either already attractive or where dividends should grow substantially.

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Duke Royalty

38.2p
Market capitalisation: £98.5 million
Prospective yield: 5.6%

Duke Royalty (LSE:DUKE)provides exposure to royalty-based income from cash-generative businesses. Other royalty businesses are focused on mineral resources. Guernsey-registered Duke was also focused on minerals when it was known as Praetorian Resources, but those mining investments were sold five years ago. Duke currently invests in companies in the hospitality, industrial, healthcare, technology, media and utility sectors.

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Duke provides secured capital for a business over a set period - that tends to be between 25 and 40 years. This investment generates royalty revenues, which are related to the revenue performance of the investee business. Potential investee companies are carefully researched prior to making an investment. They tend to have long-term trading records.

Duke has extended its revolving borrowing facility from £30 million to £35 million and it lasts until February 2026. There is potential for the facility to increase to £55 million – subject to the loan to value figure.

Net debt was £5.6 million at the end of January, so the facility provides plenty of cash for further investments. Since then, there has been a new investment of £6.2 million in steel products fabricator Fabrikat and a follow-on investment of £2.2 million in Pearl and Dean owner Step Investments.

Quarterly dividends stopped early in 2020 but they were resumed in November with a 0.5p a share payment. The next payment will be 0.55p a share. The ongoing annualised dividend could be 2.15p a share, compared to the 2019-20 total dividend of 2.9p a share. This would be covered by earnings and should start growing again. That makes Duke an attractive income investment.

Sureserve

68.5p
Market capitalisation: £109.3 million
Prospective yield: 1.8%

Compliance and energy saving services provider Sureserve (LSE:SUR) has been transformed in the past few years. It had slumped into loss, but new management returned it to profit and there are growth opportunities from government investment in renewables and energy efficiency. Sureserve has shown its resilience during the Covid-19 lockdown.

Long-term contracts underpin the business. In the year to September 2020, revenues declined but pre-tax profit improved from £8.3 million to £9.4 million.

Revenues and profit both grew in the compliance operations, which monitors gas and other safety requirements for social housing organisations, partly helped by the short-term margin benefits from having limited traffic on the roads reducing times between jobs. The contribution from energy services declined as it was harder hit by the lockdown.

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Sureserve moved back into a net cash position, although this was swelled by delayed tax payments. The dividend was doubled to 1p a share and a further rise to 1.25p a share is expected this year.

The yield is not particularly high, but Sureserve provides the potential for significant growth in dividends. They are expected to rise to 1.8p a share by 2023 - nearly four times covered by forecast earnings - but strong cash generation means that there could be a higher payment.

The energy services division has the greatest upside potential. It is benefiting from smart meter installations gaining momentum, while there should be more business for the insulation operations. There are also growth prospects in newer areas, such as heat pumps. Operating margins are currently a lot lower than for the compliance division, but they are likely to get nearer to the 7% achieved by that division. Bob Holt is stepping down as executive chairman. A long-term ‘buy’.

Watkin Jones

214p
Market capitalisation: £548.2 million
Prospective yield: 3.7%

Watkin Jones (LSE:WJG)is changing its focus from developing student accommodation to build-to-rent and affordable housing. Build-to-rent is set to be a growth area for many years as more people rent rather than buy, but there is still likely to be plenty of student accommodation development opportunities for the foreseeable future.

Developments are bought by institutional investors. Build-to-rent was around one-quarter of revenues last year and that should increase to more than two-fifths in two years’ time. Build-to-rent does not have the gross margin of student accommodation, but the contribution to gross profit should rise from one-fifth to more than one-third. There are 4,466 apartments secured or subject to planning permission over the next five years.

In the year to September 2020, revenues dipped from £374.8 million to £354.1 million, while pre-tax profit fell from £50.4 million to £45.8 million. That profit figure excludes the £14.8 million provision to replace cladding on previous developments. A final dividend of 7.35p was announced, conforming to the two-times cover policy, down from a total dividend of 8.35p a share the previous year. 

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Pre-tax profit should recover to £50 million this year, putting the shares on 14 times prospective earnings. There could be a dividend of 8p a share. The longer-term potential profit and dividend growth is attractive.

Alumasc 

171p
Market capitalisation: £61.8 million
Prospective yield: 4.4%

Alumasc Group (LSE:ALU) has done well since it was a 2020 recommendation of the year. The building components supplier is reaping the benefits of its cost savings and efficiency improvements. Annualised cost savings of £2.4 million have been achieved.

The first Covid-19 lockdown delayed the improvement in trading, and revenues and profit declined in the year to June 2020, but there has been a bounce back in building and construction activity since last summer.

Trading was ahead of expectations in the six months to December 2020 and this sparked a significant forecast upgrade for the full year. Pre-tax profit is expected to be £8.9 million, compared with the previous estimate of £6.4 million. Operating margins are set to nearly double to 10.8%.

The building envelope division returned to profit in the first half. That was mainly due to the turnaround at the solar shading and balconies business Levolux, which also grew its exports to the US.

A strong balance sheet means that there is an opportunity to make acquisitions to increase the scale of the business. 

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The share price has more than doubled over the past year, yet the prospective yield is still more than 4%. A 7.5p a share total dividend is forecast, with an increase to 8p a share in 2021-22. This year’s dividend is covered more than 2.6 times by forecast earnings and that leaves scope for higher payouts. The shares are trading on less than nine times prospective earnings, falling to eight the following year. This low rating provides potential upside for the share price.

Somero Enterprises Inc

390p
Market capitalisation: £218.9 million
Prospective yield: 4.5%

US-based concrete levelling equipment supplier Somero Enterprises (LSE:SOM)has a policy of paying an ordinary dividend based on the level of profit in a financial year, combined with a special dividend of 50% of cash balances in excess of $20 million (£14.3 million).

The international spread of the business is a help because downturns in one region can be offset by better trading in other areas of the world. The 2020 figures were slightly ahead of expectations with a 1% decline in revenues to $88.6 million and pre-tax profit 8% lower at $25.7 million.

More importantly, $30.6 million of cash was generated by operations. Net cash was $35.4 million at the end of 2020.

The final dividend in 2020 was 12.81 cents a share, taking the ordinary dividend for the year to 16.81 cents a share. On top of this there was a special dividend of 18.1 cents a share paid out of excess cash, so the total dividend was 34.91 cents a share.

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The combination of ordinary and special dividends means that the payout will differ from year to year and will not grow smoothly as it would with the other picks. This year total dividends of 24.5 cents a share is forecast. That is based on unchanged pre-tax profit. Cash is also being used to buy back shares. The shares are trading on 15 times prospective 2021 earnings. As restrictions ease there could be potential for a better performance and higher dividends.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.