Three Sturdy Dividend Small Caps

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Here’s a quick question. Do you like your dividends? Well, I’m pretty sure for most investors, the answer’s a resounding ‘yes!’

After all, carefully selected dividend shares can have the ability to provide a sweet source of growing income through the years.

But, in the hunt for dividends, there’s always the danger that investors might fall into the trap of ponying up the cash for a high-yielding share only to see those dividends shrink over the years as the business suffers.

To be sure, there’s nothing inherently wrong with wanting to find shares with high dividend yields. The problem comes though, when it’s the only criteria used for selection. That can be dangerous, as a share’s yield tells us nothing about how safe its dividends are.

So, what can one do to find some safe dividends? Well, we can start with the balance sheet. Companies that have clean balance sheets – those that carry little or no debt relative to cash – are better equipped to rough it out in tough economic conditions.

And, the cash pile there might even come in handy in helping to maintain dividends as a company waits for business to pick up during downturns.

While it’s not the sole criteria for finding good dividend shares, it’s also a decent starting point for investors to sieve out the wheat from the chaff.

With that in mind, let’s take a look at three small caps that have a clean balance sheet and sport dividend yields higher than the Straits Times Index’s (SGX: ^STI) yield of around 2.7%.

Japan Foods Holding (SGX: 5OI) has a tiny market cap of only S$101m and is in charge of 15 different restaurant brands (nine are franchised, while six are self-owned) that serve different types of Japanese cuisine with a particular focus on ramen, a type of noodle dish.

These brands, with the most important ones being Ajisen Ramen and Menya Musashi, are scattered across a total of 56 restaurants and food court outlets in Singapore, Malaysia, Indonesia, Hong Kong, and Vietnam.

Its latest half-year results were released on Monday evening. For the half-year ended 30 Sep 2013, Japan Foods’ revenue had grown 1.8% year-on-year to S$31m while earnings per share jumped by 28% to 3.25 cents as margins were greatly improved due to better control of raw material costs.

Japan Foods’ balance sheet now shows it carrying S$18.3m in cash with no debt. The company, which has a knack of growing its dividends really quickly, paid out 2.5 cents in dividends last year. This gives its shares a historical dividend yield of 2.8% based on its current price of S$0.90.

Kingsmen Creatives (SGX: 5MZ) is up next. At a price of S$0.93 per share, the entire company carries a market value of approximately S$180m. The company paid out 4 cents in dividends last year, giving its shares a historical dividend yield of 4.3%.

Kingsmen’s in the Meetings, Incentives, Conventions, and Exhibitions (MICE) industry. It earns its keep by helping to design, manufacture and set up installations for exhibitions, museums, theme parks, retail stores etc.

Some of its past clients include international luxury brands such as BMW, Audi, Fendi, Chanel, Tag Heuer, Gucci, and more.

Its latest second quarter results, for the three months ended 30 June 2013, saw the company’s balance sheet carry S$58m in cash with only S$4m in total debt. Revenues for the half-year grew 4% year-on-year to S$122m while profits went up by 5% to S$7.6m.

The company’s releasing its third quarter results today after the market closes, so investors can have a look at its latest numbers and scrutinise its balance sheet.

Boustead Singapore (SGX: F9D) rounds up the trio today. With a market capitalisation of S$772m at its current price of S$1.495 per share, the company does carry a certain heft, though it’s still a little too small to be considered a mid-cap company.

Boustead’s operations can be divided into two segments: Infrastructure-Related Engineering and Geo-Spatial Technology.

With the first segment, Boustead helps design and construct industrial and municipal water and waste water treatment plants; design and supply heater systems for the oil & gas and petrochemical industries; design and engineer mini power plants and solid waste energy recovery plants; and design and build industrial facilities, among others.

The Geo-Spatial Technology segment is involved with the distribution of digital mapping software from the privately owned American company ESRI. The softwares deal with Geographic Information Services (GIS), where users can input various kinds of data into a digital map, and these data can be layered on to each other in myriad combinations to form new kinds of three-dimensional maps for better information-processing and planning.

Since it’s mentioned here, Boustead’s balance sheet has to fit our bill. Its recent earnings release for the quarter ended 30 Sep 2013 showed that it had S$301m in cash with only S$28m in total debt. Its income statement didn’t look so good though, as quarterly profits were down 41% year-on-year to S$9m.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Japan Foods Holding and Kingsmen Creatives.