The financial fallout from COVID-19 is now in plain sight as the first wave of results which fully capture the damage from forced lockdowns are released to the market. For income investors, the profit drops and subsequent dividend reductions (or lack of increases) from traditional payers such as CBA, Telstra and Transurban are sobering.

But while blue-chip yield companies are suffering, opportunities are brewing in the world of small caps, where select businesses are thriving and boosting payouts. Victor Gomes of Eiger Capital makes his debut on this episode of Buy Hold Sell to join Ben Clark of TMS Capital. They discuss five stocks within the small-cap universe offering solid and sustainable dividends with the potential for capital growth.

The stocks discussed range from a retailer tapping into the online shopping boom and churning out a 5%+ fully franked dividend to a defensive technology company with pricing power and a solid 4.4% yield.

Notes: Watch, read or listen to the discussion below. This episode was filmed on 12 August 2020.

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Edited transcript

Vishal Teckchandani: Welcome to Buy, Hold, Sell, brought to you by Livewire Markets. My name is Vishal Teckchandani. In this episode, we're shopping for small-cap stocks that pay high and sustainable dividends. Joining me on the show is Victor Gomes from Eiger Capital and Ben Clark from TMS. Ben, let's start with you. Nick Scali. What a cracking result. Boosted its earnings, boosted its dividend on a nearly 6% fully franked yield. Buy, hold, sell?

Nick Scali (ASX:NCK)

Ben Clark (Buy): I think it's a buy, Vishal. The highlight of that result was the info on what's happening on right now. We're seeing 50% sales growth versus the PCP, in that May, June, sort of into July period. So the next result's going to be even stronger, believe it or not. I think they've got some margin expansion at the moment. They're benefiting from the COVID sort of changes in shopping habits. Buy.

Vishal Teckchandani: Victor, who would've thought that in this day and age, the banks would be cutting their dividends and furniture retailers would be increasing theirs? How the tables have turned. Buy, hold, sell, Nick Scali?

Victor Gomes (Hold): It's a hold for me. I agree with Ben, it was a great result. And it's amazing who the beneficiaries of this COVID crisis have been. It surprised me to see some of the beneficiaries. They've got into some very strong trading update numbers in this year. I'm just a bit cautious on how long it continues. There's been a lot of stimulus in the market. It's unnaturally... it's unsustainable, the amount of stimulus, and I'm not sure what the impacts of that will be. Clearly the growth rate is going to slow. They're good operators, I'd probably prefer someone with a bit more online sort of presence and they don't, so I think it's a hold.

Shopping Centres Australasia (ASX:SCP)

Vishal Teckchandani: Another offline stock, Shopping Centres Australasia, 22% plunge in earnings after getting smashed on rents. Buy, hold, sell, SCP?

Victor Gomes (Sell): It's not one of the worst of the retail REITs, but it's a sell. Because I think structurally, it's just going to be hard to fight those headwinds. Why I say it's not one of the worst is because most of their key tenants are shopping centres, but then they wrap that shopping centre around with a lot of specialty small retailers, and those retailers are really going to struggle. The shift to online that the COVID has resulted is permanent. It might slow, but it won't go back, and a lot of those retailers will suffer. They'll struggle to get their rents up I think. You're seeing it in the spread on the new leases. They're taking a cut. They're having to meet the market. I think there are better places to find value.

Vishal Teckchandani: Ben, it's still offering a 6% distribution, but you wonder like Victor said if in the environment we're in whether that's a dividend trap. Buy, hold, sell?

Ben Clark (Hold): Yeah, and the worry there is that the payout ratio is 100%, so there's really no room for them to move. I'd probably be a bit more optimistic on it. I'd say it's a hold. The supermarkets are key tenants, they're good defensive earners, they'll keep paying the rents. So it is more around those marginal rents. It's trading around NTA. NTA will probably come off a bit, so there's definitely no catalyst I can see for it to be a buy, but I think with that yield, and even if it comes off a bit it's still a hold.

Regis Resources (ASX:RRL)

Vishal Teckchandani: Staying with you Ben, who would've thought we'd be talking about gold in an income investing episode? Regis Resources, on a nearly 3% fully franked yield, buy, hold, sell?

Ben Clark (Hold): I think it's always dangerous to be buying a mining stock for a dividend, but Regis I think's a hold. They're at the lower cost curve, amazing cashflows. They're getting into that business at the moment. Pretty flat production profile, and I would say they have had some operational issues in the past. And you can actually look at it, they've actually fallen slightly the sale price this year in a bumpy year for gold, which is frustrating. So I'd have a hold.

Vishal Teckchandani: Victor, pot of gold or Pandora's box? Buy, hold, sell on Regis?

Victor Gomes (Hold): It's a hold for me, too. Regis has got a fabulous track record in the longer term, but I think the outlook isn't as rosy for them. Their typical type of operation is simple, open pits, low cost, and they're having to move into McPhillamys which is their main project that they're going to fill the hole with. It's underground. It's got big capex. It's complex. It's in New South Wales and not WA. The dividend is not enough for me, so I'm a hold.

**Correction: Regis Resources’ McPhillamy’s project was mistakenly referred to as an underground mine. This is incorrect – the project is, in fact, an open cast mine.**

Adairs (ASX:ADH)

Vishal Teckchandani: Well fair enough. Let's find out what is a good dividend for you. What's the secret stock that you've got for me today?

Victor Gomes (Buy): It's not so secret recently because the market's discovered it, but I think Adairs, it's been a massive beneficiary of the shift to online from the pandemic. It does have stores, but a lot of those stores are on hold-off. Again, another reason why I don't like the REITs, because they can essentially walk away from the leases whenever they want. And it allows them to reposition their portfolio. They're going to be an omnichannel operator, but online has gone from 5% to more than 30% over the last five years. It's paying a 5% plus dividend yield. It's growing like topsy turvy, and then they've bought the pure online furniture retailer Mocka at a great price. It's got less revenue than Temple & Webster, but actually makes more money, so it's actually a great business on a fraction of the multiple, so I like it.

IRESS Market Technologies (ASX:IRE)

Vishal Teckchandani: Okay. Ben, what's a small cap that you've got for me today that's spitting out cash?

Ben Clark (Buy): Mine's IRESS Market Technologies. So this is a fairly mature tech business I'd say. It's not going to have kind of the hyper-growth that the businesses that are flying at the moment, but it is quite defensive. It's got the number one platform that financial planners use in the country. It's also got the IRESS screens that a lot of advisors use. It's the dominant player, it puts up its prices consistently each year, it's slowly expanding offshore, and it's starting to get some gains there. Did a capital raising recently, reaffirmed guidance for the year, it's going to pay about 4.4%, 40% franked. And it's unloved. It's well off its recent highs. I think that for me is a buy.

Vishal Teckchandani: Well the big caps might be powering back on their dividends, but in the world of small caps, there's plenty of opportunity to generate some good income.

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