Five AIM income stocks for your ISA in 2023

Our award-winning AIM writer has identified a handful of smaller companies with big dividends and potential to maintain or even grow the payout.

It is coming to the end of the tax year and time to make the most of your £20,000 Individual Savings Account (ISA) allowance if it has not been utilised already. There are many attractive yields available from AIM companies that would be suitable for inclusion in an ISA.

High yields are not the only way to assess the AIM dividend payers, though. The ability to continue to pay dividends is a major factor that has to be taken into consideration. The potential growth in dividends is also important.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

Here are five companies that have attractive yields with the prospect that the income should grow, or at least be maintained, over the coming years.

Serica Energy (SQZ)

250p

Forecast yield: 6.4%

North Sea oil and gas producer Serica Energy (LSE:SQZ) recently completed the acquisition of Tailwind Energy, making it one of the top 10 oil and gas producers in the UK North Sea. This used up some of the cash pile generated from high oil and gas prices, but there is plenty more even after the additional tax burden.

Serica started to pay dividends for the 2019 financial year, and it paid a maiden interim dividend for the 2022 financial year. Peel Hunt forecasts a total dividend of 16.1p a share for 2022, rising to 16.9p a share in 2023.

These dividends are well covered by earnings and cash so they will hardly make a dent in the cash pile. Serica Energy is forecast to generate £394 million in cash from operations during 2023. More than £100 million could be spent on capital investment this year, which is greater than the cost of the dividend, so net cash is expected to be £352 million at the end of 2023. That is after acquiring Tailwind Energy and its debt.  

This provides scope for further gradual increases in the dividend even after the high profit levels start to subside. The oil price used in the forecast falls over the next two years, but production increases will help to offset that. Production guidance for 2023 is between 40-47 million barrels of oil equivalent – the current production rate is 43.3 million barrels of oil equivalent.

The company is capitalised at £682.4 million and Peel Hunt forecasts net cash of £487 million by the end of 2024. Profitability will be volatile for an oil company, but Serica Energy has a strong balance sheet. There could even be special dividends if the cash is not used for further acquisitions.

Hargreaves Services (HSP)

440p

Forecast yield: 4.8%

Hargreaves Services (LSE:HSP) not only offers a high yield, but also the opportunity to acquire shares at a significant discount to net asset value, or NAV. Profit has been boosted by a strong contribution from German associate company HRMS, but the core businesses have good prospects.

Margins and profit are improving in the first half, helped by a further land sale. Earth moving work linked to the HS2 high-speed railway line is building up and helping the services business to grow, while other operations are also doing well. Longer term, there is more to come from land sales, as well as recurring income from renewable energy projects renting land from the company.

HRMS made an increased contribution in the first half, but the bumper conditions are unlikely to continue. Coal and minerals trader HRMS has always been a volatile business in terms of profit and the contribution has been unusually strong for the past two years.

The latest interim dividend is 3p a share – the shares go ex-dividend on 23 March. The final dividend is expected to be 6p a share, while there will also be he additional 12p a share dividend that is paid out of cash repatriated from HRMS.

• The AIM stocks the pros are buying as they bet on a recovery
• Six speculative UK share ideas for 2023

Full-year pre-tax profit is expected to decline from £32.7 million to £25.8 million. Net debt is expected to be £18.2 million at the end of May 2023. There could be a further decline in pre-tax profit to £23.1 million in 2023-24, but the underlying dividend will increase and the 12p a share additional payment will continue.

The NAV was 603p a share at the end of November 2022 and the shares are trading at a 27% discount to that figure. The NAV includes the land portfolio at cost, so the underlying NAV is likely to be higher. This provides potential for share price growth on top of the income.

Personal Group Holdings (PGH)

216p

Forecast yield: 5%

The core businesses of employee benefits services and insurance provider Personal Group Holdings (LSE:PGH) did well last year with recurring revenues growing. However, overall progress was held back by the poor performance of the Let’s Connect electronic products provider. Strikes at the Royal Mail and difficulty in obtaining stock hit that business.

The insurance business increased annualised premium income by 15% to £28 million, following the previous decline due to Covid. The relationship with Sage offering employee benefits to smaller businesses is paying off, with annualised recurring revenues of the benefits division increasing from £3.2 million to £5 million, mainly down to that Sage relationship.

Cenkos forecasts a 2022 pre-tax profit of £4 million, down from £4.7 million in 2021. Net cash is more than £18 million. Total dividends will be maintained at 10.8p a share. The momentum of the core business should continue into this year.

The share price has performed poorly over the past year and the latest figures should indicate the bottom, with profit recovering from now on. The 2023 pre-tax profit forecast has been trimmed from £6.6 million to £6 million, partly due to strike action at clients. There is scope for an upgrade if conditions improve.  Retaining employees is still important to businesses so the outlook for Personal Group is positive. The dividend can be rebuilt along with improving profit and 14p a share is forecast for 2023.

Alumasc (ALU)

160p

Forecast yield: 6.4%

It was always going to be difficult for construction products manufacturer Alumasc Group (LSE:ALU) to repeat the level of profit achieved in 2021-22. Even though interim revenues were 5% ahead at £45 million, pre-tax profit fell 11% to £5.6 million. The corresponding period included high margin Chap Lap Kok airport project work for the water management division, and the phasing of projects hit the latest figures.

The figures exclude the loss-making Levolux business, which has been sold. Alumasc has withdrawn from installation business and is concentrating on manufacturing. New product launches are helping to offset weakness in the housebuilding sector, and the focus on the higher end of the roofing market has paid off. The water management division should have a much better second half as new phases of significant projects start up.

Management indicated its confidence in the future with the 1.5% increase in the interim dividend to 3.4p a share. The forecast 2022-23 dividend is 10.3p a share. Further steady growth in the dividend is anticipated.

• Watch our video:  An AIM share tip and two stocks we've just bought
• Watch our video: Three AIM stocks we own and two we have avoided

Alumasc is gaining market share and exports are increasing. The second half will be stronger than the first half, but pre-tax profit is expected to decline from £12. 7million to £11.3 million. The dividend would be covered 2.4 times on that forecast, while net debt should be minimal as supply chain worries ease and stocks are reduced. That leaves room for earnings enhancing acquisitions to broaden the range of products offered. A reduced cost base means that Alumasc can cope with current pressures and is in a good position to prosper when its markets improve.

Polar Capital (POLR)

542p

Forecast yield: 8.5%

Fund managers have had a tough time in the past couple of years, especially if they do not focus on the largest companies. Polar Capital Holdings (LSE:POLR) is set to report a second profit decline in a row in the year to March 2023.

Polar Capital had assets under management of £18.5 billion at the end of 2022, down from £22.1 billion on 1 April. The first quarter was hit by large declines in technology company share prices and the closure of funds. The technology fund outflows are slowing, and they are partly offset by improved performance. Other sectors, such as healthcare, are generating net inflows.

• 10 UK equity income trusts offering 4%-plus yields
• 10 things you must know about dividends and income investing
• This is what 2023 has in store for AIM’s £1bn companies

Performance fees are down from £4.3 million to £1.9 million in the nine months to December 2022 and they are likely to still be around one-third of the previous level in the full year.

The 2021-22 dividend was 46p a share and that is likely to be maintained this year, although it will not be covered by forecast earnings. Net cash is expected to be £96.7 million at the end of March 2023.

The shares are trading on 15 times prospective 2023-24 earnings, which could be the bottom. Polar Capital is still highly profitable in tough times. Investors will regain interest in technology and other high growth sectors and when that happens Polar Capital will benefit.

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