Five AIM income stocks for your ISA in 2022

Our award-winning AIM writer picks a handful of shares listed on the junior market that offer decent yields and prospect of dividend growth.

This week, I am writing about potential purchases for Individual Savings Accounts (ISAs) that will provide income for investors. There are plenty of AIM companies that pay dividends and many companies that stopped paying dividends during the early months of the pandemic have returned to paying dividends at similar or higher levels.

High yields are not the only way to assess the AIM dividend payers. The potential growth in dividends is arguably even more important. Here are five companies to buy that have reasonable yields with the prospect that the income should grow over the years.

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Gateley

185p

Legal services provider Gateley (LSE:GTLY) was one of the first lawyer partnerships to become an LLP and the second law firm to gain approval to change to a corporate structure. The business has combined organic growth and acquisitions to achieve its expansion since it joined AIM in June 2015.

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Gateley reported organic growth of 23% in the six months to October 2021. Overall revenues increased from £50.5 million to £62.3 million. That growth partly reflects the weak comparative figures as well as underlying growth. All four divisions – business services, property, corporate and people (employment and pensions) - grew revenues with only the property division having a small contribution from an acquisition.

Utilisation levels improved from 79% to 84% and that improves profitability. Underlying pre-tax profit increased from £7.5 million to £8.5 million. The profit has not increased as fast as revenues because there were pay cuts during 2020 and pay was subsequently increased.

Management is seeking acquisitions to add to organic growth. There is normally a second half weighting to the figures. A full year pre-tax profit of £21 million is forecast, which puts the shares on just over 13 times prospective earnings.  

Gateley consistently grew its dividend up until 2019-20 when it did not pay any dividends. It returned to paying dividends last year. The interim dividend was one-fifth higher at 3p a share. The total 2021-22 dividend is forecast to increase by 15% to 8.6p a share and then rise to 9.43p a share. The prospective yield for this financial year is 4.6%.

The share price is modestly rated considering the growth potential and attractive yield.

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Duke Royalty

37.75p

Duke Royalty (LSE:DUKE) has a portfolio of royalty investments in companies involved in a variety of businesses, mainly hospitality, industrial, healthcare, technology, media and utility sectors. Duke provides an injection of secured capital for a business over a period of between 25 and 40 years. This investment generates royalty revenues that are related to the revenue performance of the business.

Guernsey-registered Duke was originally a mining investment company, but the strategy changed in 2017 to providing cash injections to solid businesses with growing revenues in return for royalties. The deal size tends to be between £5 million and £20 million.

Thorough research is undertaken into the potential royalty clients and the deals are set up in a way to reduce the risk of Duke losing money. There is risk and there was a loss on the investment in river cruising company Temarca, which was hit hard by Covid restrictions.

Net assets were 34p a share at the last balance sheet date. There are 13 investments and many of these have received follow-on investment from Duke as they grow or make acquisitions.

The dividend paid in the year to March 2021 was reduced from 3p a share to 2.1p a share to preserve cash during the pandemic. The dividend should grow steadily from now on. It is paid quarterly, and the dividends paid this financial year should total 2.4p, rising to 2.9p next year. This year’s prospective yield is 6.4%, rising to 7.7%. That is a particularly attractive yield.

Kitwave

149p

North Shields-based Kitwave (LSE:KITW) is a wholesale business focused on ambient groceries and chilled and frozen food. It also has a foodservice business that supplies pubs, vending machines and caterers. That latter part of the business was worst hit by the Covid pandemic, but the run rate of business is getting back to 2019 levels.

In the year to October 2021, revenues fell from £592 million to £381 million, while underlying pre-tax profit improved to £4.5 million. After the year end, Kitwave acquired Devon-based foodservice supplier MJ Baker for £18.5 million net of cash acquired. Last year, pre-tax profit slumped from £2.7 million to £1.5 million, but it should recover this year making the deal earnings enhancing. 

The full-year figures prompted the third upgrade since flotation. The rate of recovery in foodservice is helping. A pre-tax profit of £13.5 million is forecast, rising to £15.7 million in 2022-23.

Kitwave paid a total dividend of 6.75p a share for its first year as an AIM-quoted company. This could rise to 7p a share this year and 7.9p a share next year. The prospective yield is 4.7%. The share price is just below the 150p placing price last May.

The core business proved resilient during the lockdown and the hard-hit foodservice division is bouncing back making the prospective 2021-22 multiple of less than 10, combined with the yield, look attractive.

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The Property Franchise Group 

332p

The Property Franchise Group (LSE:TPFG) owns and franchises lettings and estate agency brands and it also operates online estate agency business EweMove. Revenues are generated from franchise fees and selling franchises, plus financial services. Trading in the estate agency business was boosted by the stamp duty holiday, but the group has continued to trade strongly since that period ended.

The lettings business is a solid and growing operation. There are 74,000 rental properties under management. Last March’s acquisition of Hunters Property has proved to be highly successful. Even if the acquisition is excluded, growth has been impressive.

The 2021 forecast pre-tax profit is £9.28 million, up from £5.4 million. Just after the Hunters acquisition, a 2021 pre-tax profit of £8.3 million was expected, so that shows how well TPFG did last year. There should be continued growth this year, which will include a full 12-month contribution from Hunters, and 2022 pre-tax profit should be in excess of £10 million.  

Dividends are expected to increase from 8.7p a share to 11.2p a share in 2021, rising to 12.7p a share in 2022. These dividends should be at least twice covered by earnings and TPFG is expected to move into a net cash position during 2022.

The prospective 2022 yield is 3.8%. The share price has held up much better than most this year, which reflects the solid lettings business, which dominates the income and should help the dividend continue to grow even if property sales are more muted.

Life Science REIT 

100p

Life Science REIT (LSE:LABS) joined AIM at the end of last year, so it does not have a dividend track record. The offer raised £350 million and net assets immediately after float expenses were £343 million. This will be invested in properties that have life science businesses and organisations as tenants. There is a lack of supply of good quality space for pharma companies. A 4% yield is being targeted, based on the issue price of 100p, with annual growth of 5%.

Life Science REIT has to invest the cash raised to generate the income to pay the dividend. Within a few weeks, the company had invested more than 50% of its cash in properties. There have been five transactions in London St Pancras, Cambridge and Oxford. The largest investment was the £77 million paid for a nine-storey office and laboratory building in Rolling Stock Yard, north of St Pancras. The net initial yields range from 4.4% to 5.9%.

There was a potential pipeline of investments with a total value of £445 million when the company joined AIM, so there are still some of these properties that have yet to be secured. Borrowing will be used to buy more properties. Loan to value will be between 30% and 40%.

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The faster the rest of the money is invested the faster the 4% yield target can be met. It seems probable that this could be achieved in 2023. There will still be a lower dividend this year. A maiden interim will be paid in the autumn.

Life Science REIT offers steadily increasing income combined with potential for asset value growth given the excess of demand over supply for the space that the company is offering.

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

Andrew was recently named Journalist of the Year at the 2021 Small Cap Awards.