Stockopedia: 10 AIM shares set to grow their dividends

Stocks on the smaller market could be a good pick for this ISA season.

With ISA season upon us, it’s likely that many investors are thinking about how and where to deploy funds in the stock market. A year ago, markets were creaking under the weight of Covid-19 uncertainty, but today there’s more optimism around.

One index that has done remarkably well over the past 12 months is AIM- and there are particularly encouraging signs from some of its dividend-paying shares.

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As a market designed for smaller, growth-oriented stocks, AIM has not traditionally been a venue where you might expect blockbuster dividend payments. But research suggests that stocks that do pay cash returns to shareholders tend to be more dependable, and potentially less volatile, than those that don’t. That’s because dividends are generally a feature of companies that have reached a solid level of maturity and financial stability.

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A culture of paying dividends has been growing on AIM in recent years, according to Link Asset Services, which tracks this data.

The proportion making payouts to investors grew from 26% in 2012 to 35% in 2019. Covid-19, of course, has disrupted that trend, with many firms shelving their dividends in the face of uncertainty. But dividend forecast data shows that a number of them either didn’t cut their payouts or are expected to resume them in the year ahead.

Hunting for AIM dividends

As an index, AIM has a modest average forecast yield of between 0.7% and 1.1% - but that’s distorted by the fact that only a third of the companies on the market actually pay a dividend.

Look a little closer and it’s certainly possible to find yields that compare favourably with the average of 3.3% to 3.6% on offer on the main market.

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Another difference between dividend payers on AIM and the main market is that, from a sector point of view, AIM has far fewer stocks in defensive industries such as consumer staples, utilities and pharmaceuticals. So in the hunt for dividends on AIM it’s worth thinking about the cyclical nature of stocks and whether dividends could be at risk in firms that can be buffeted by economic turmoil.

With these ideas in mind, this screen looks for AIM shares (with a minimum market cap of £40 million) with a yield of at least 3.2%, dividend cover of at least 1.2 times earnings and positive dividend growth forecasts for the year ahead.

Of the top 10 results, half the names managed to navigate the past 12 months without cutting their dividends. They include: Polar Capital (LSE:POLR), Curtis Banks (LSE:CBP), Brickability (LSE:BRCK), FRP Advisory (LSE:FRP) and NWF (LSE:NWF). The others did trim their payouts last year but are forecast to see them grow again from here.

Dividend growth for the year ahead

In times of turmoil, dividends are one of the first things that companies cut in order to protect themselves. That’s why many stocks right across the market ditched payouts last year. But despite this, dividends can be a useful pointer to firms that are financially robust and capable of managing investor returns without damaging their businesses. 

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And when it comes to AIM, that’s an important extra guide in the search for better quality companies. With dividends set to grow from here for a number of firms, AIM could be an interesting place to consider deploying funds this ISA season.