Dividend-paying small caps challenge conventional perceptions

Another micro-cap company announced an increase in its dividend this week, adding to the list of smaller companies going against conventional perceptions and providing income to their investors.

According to Gervais Williams of Gartmore this is further evidence of a trend that he believes will gather strength over the next few years and lead to small cap outperformance.

"Sustained income is becoming more difficult for investors to find. Large caps have been cutting their dividends, interest rates are exceptionally low and the income from cash accounts has fallen substantially. There is an opportunity for smaller companies to fill this gap and provide the income that investors are searching for."

Despite perceptions that small companies generate returns for their investors by event-driven means, such as oil discoveries or takeovers, there have actually been two occasions in the past 60-odd years when small cap dividends growth has increased substantially in real terms, and each was accompanied by a multiyear period of outperformance by smaller companies relative to larger ones.

The latest company in to announce a dividend increase is iomart Group, which is AIM-listed and specialises in data centre services and web-hosting. The company, of which Gartmore is the largest shareholder, announced a 33% increase in its interim dividend on Monday, from 0.3p to 0.4p per share.

This trend has seen other small companies, like Penna Consulting and Origin Enterprises (both also held by Gartmore), increase or initiate dividend payments.

"The small cap income story is one that we have been anticipating for some time now, and it's pleasing to see smaller companies that recognise the value of providing growing income to their investors, and challenging the inherited wisdom about how smaller companies should operate and generate returns for their shareholders. We think that this trend is just one factor that puts smaller companies in a strong position to outperform over a multiyear period"