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When thinking about UK shares, there’s a big gulf between blue-chip giants and small-caps. Blue-chips tend to offer stability, predictability, and often lower risk, while less stable small-caps can offer unusually high dividends or scope for gains.
I believe that while the Footsie might be more stable and less likely to deliver surprises, small-caps sometimes give an investor the chance to secure higher income or growth. Of course, there are always risks with smaller companies: lower liquidity, limited resourcing and sensitivity to shifting markets. Low liquidity’s a particular concern as it may be harder to sell shares for the price an investor might want.
Yet now and again, I find promising small-caps with stable balance sheets and excellent income potential. Here are two I think investors may want to consider as part of a diversified income portfolio.
Reach
Reach (LSE: RCH) is a publishing company behind well-known newspaper and magazine brands like the Express, Mirror, Daily Star, and numerous regional titles such as Manchester Evening News. It’s a business that’s been through a major transformation, grappling with the decline of print media and a shift to digital.
Despite these challenges, the company has a market capitalisation of around £210m and offers a massive dividend yield of 11%, which is certainly attractive for income seekers. Reach has also paid out a continuous dividend for the past five years. Its dividend payout ratio, the percentage of earnings paid to shareholders, is 46.4%, suggesting the company’s dividend payments are well-covered.
The balance sheet looks healthy too, with around £62.8m in debt against £681m of equity, giving it a low debt-to-equity ratio of just 9.2%.
However, the media sector’s facing intense competition from online news and social media. A recent announcement to cut over 320 jobs points to continued pressure on Reach’s business model. While it’s shifting to digital, advertising revenue can be volatile, and it’s a constant battle to monetise its online content effectively.
There’s a risk that ongoing structural challenges in the industry could impact future profitability and threaten its ability to maintain the generous dividend.
Record
Record‘s (LSE: REC) a specialist currency management firm. It offers a range of services from passive and active hedging to managing currency for return. It’s a niche business, but one that’s quietly built a strong presence in the asset management industry.
With a market capitalisation of roughly £113m, Record has a good dividend yield of 7.7%. It has a strong track record of continuous dividend payments for five years, with four years of growth, which shows a commitment to rewarding shareholders.
However, a key risk for this company is its dividend payout ratio. At a very stretched 98.7%, it suggests that almost all of the company’s earnings are being paid out as dividends. While this is great for income today, it leaves very little room for error. If the company’s earnings were to dip, even slightly, it might have to cut the dividend. While it’s a stable business, an investor should be cautious about that high payout ratio and weigh up the possibility of a future dividend cut.
Fortunately, its balance sheet’s solid with minimal debt of just £7.1m against £29m of equity – so it doesn’t appear to have any immediate financial concerns.
