10 AIM shares with eye-catching yields for dividend investors

There are plenty of AIM shares offering generous dividends as well as attractive growth prospects. Stock screen expert Ben Hobson scans the small-cap market for the best ones.

Dark clouds on the economic horizon have spooked investors out of speculative shares this year. Rising inflation and the prospect of recession have forced a re-think about the appeal of smaller growth companies. It’s no surprise that the value of the small-cap focused Alternative Investment Market (AIM) has fallen by nearly 30% in 2022.

Despite these concerns there are reasons to be cheerful. Dividend payouts from AIM companies have continued to rebound from the pandemic shock two years ago. And with share prices under pressure, the dividend yields on many AIM shares have risen markedly.

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For investors, this is an intriguing scenario. On one hand there has been widespread selling pressure. This has brought valuations right down, and many commentators agree that valuations look quite compelling in places.

In turn, a number of AIM-quoted companies appear to be shaking off economic fears by ratcheting up their dividend payouts. In many areas these firms have a solid dividend history and progressive growth policies. For those firms that are resilient enough to see off economic challenges down the line, the ‘growth plus income’ appeal for investors looks strong.

AIM payouts bouncing back

Dividend payouts from the AIM market have always been dwarfed by those paid across the rest of the market. But that misses a couple of important points.

One is that smaller-cap shares can statistically deliver stronger valuation re-ratings than you find elsewhere. Not all small-cap shares will manage it, and some will disappoint, but high growth tends to be found in smaller firms. If you can get that growth with the added benefit of a dividend, all the better.

Second is that dividends have become more common with AIM shares in recent years. Not only do payouts attract institutional money managers but they also send a signal of competent management. A financial payout, however small, is a sign of financial strength and that the firm takes shareholder interests seriously.

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Research earlier this month showed that AIM dividends were up by a headline 7.4% to £574 million in the first half of this year. Strip out the impact of special dividends, which aren’t usually paid consistently, and the growth rate was 19.8%.

In total, 29% of AIM companies are expected to make a payout in 2022, according to findings from asset management services firm Link Group. That’s around 220 of the 770 companies on AIM in total.

What we’ve seen in these figures in recent years is a great unwinding of a near wholesale payout cut that followed the Covid pandemic in 2020. Underlying growth in 2021, for instance, was nearly 40%. Some sectors are now back to pre-pandemic levels, including financial services, which includes asset managers, advisory firms and stockbrokers.

Names in the sector include Numis (LSE:NUM), Impax Asset Management (LSE:IPX) and Mattioli Woods (LSE:MTW), which all have projected yields that are higher than their historic (last year) yields.

But the most significant contribution to payout growth in the first half of this year was construction materials. There, firms like Alumasc Group (LSE:ALU), Michelmersh Brick (LSE:MBH) and Breedon (LSE:BREE) have all played a part - and all have projected yields above 4.0%.

To give you some ideas about where some of the highest yields can be found on AIM at the moment, this screen looks for shares with projected yields of more than 4.5%. To make the screen they must have a positive three-year history of dividend growth, and dividend cover of 1.4x earnings or more.

This small-cap high-yielder list has a leaning towards industrial and business support services sectors, although Warpaint London (LSE:W7L), the make-up business, is very much a consumer-facing firm. But generally, the stocks here echo the sense in recent research that construction services and financials are contributing a lot to AIM dividend growth.

Home-building and construction industries have sold off heavily across the market over the past year. But signs that government intervention might stave off the worst expected challenges may mean that those declines will start to slow. As investors get more certainty about the outlook, prices may begin to recover.

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In the meantime, the projected dividend yields on offer are unusually high in places. If you’re willing to do your research and dig around for stocks that are possibly oversold, those dividends could be an extra comfort when it comes to buying in.

It is essential to remember though, that high yield should always be accompanied by other considerations. Clues to company quality can be found in the track record of payouts, but it pays to look carefully at whether the firm is resilient enough to withstand economic shocks.

Looking ahead, dividends across AIM are expected to reach £1.22 billion this year. With payouts continuing to recover from the setbacks of recent years, the case for combining a focus on company growth and high dividend yields is an interesting option.

Ben Hobson is a freelance contributor and not a direct employee of interactive investor.