Hidden gems in the equity space

This may include the pace at which they can practically recruit and integrate skilled staff, or ensuring they build sometimes immature operational infrastructure in a measured way to cope with expansion.

Listed small-cap companies are often careful about taking on too much for fear of overheating, which would have serious repercussions on credibility. Most smaller companies are committed to maintaining sensible balance sheets and rewarding shareholders for being patient over the course of the journey.

After all, these are likely to be the same shareholders that could support them with more capital should a major attractive opportunity develop in the future. 

There is also a perception held by many in the market, particularly among institutional investors, that companies paying a dividend, even if initially small, demonstrate good financial discipline and have moved into a more established phase of their development as listed businesses.

Under-the-radar opportunities

While large-cap stocks in the FTSE 100 are well covered by research analysts, those further down the scale are comparatively under-researched and offer income and growth for those who know where to look. For example, one stock unlikely to feature in many UK equity income portfolios is Strix. This company is the world leader in kettle controls, with a 38 per cent share of the global market.

Strix was admitted to the Alternative Investment Market in August last year at 100p per share; with its share price today up at about 165p it still offers a prospective yield above 4 per cent.

Another hidden gem is Vianet, the UK market leader in beer flow monitoring systems in pub groups. Operating in a niche industry, the company offers a near 5 cent yield underpinned by solid cash generation.


Leveraging the technology from beer flow monitoring, it also provides telemetry for vending machines. The company has delivered consistently strong dividends over many years and is a classic example of a mature smaller company operating in a niche space.

Finally, another stock where there are strong long-term prospects is Knights Group, a UK legal services business focused on providing commercial legal advice to businesses in regional UK towns and cities.

It has good quality earnings streams with diversification across customer, fee earner and area of legal service – as well as a high degree of repeat revenue from existing customers. Management has driven a strong growth strategy: combining recruitment of quality regional lawyers, as well as making acquisitions at attractive multiples.

Knights achieves high earnings before interest, tax, depreciation and amortisation margins for the sector, through driving market leading efficiencies in the ratio of fee earners to non-fee earners.

Operating in a large addressable market, it offers the prospects of long-term profit and cash flow growth to support an attractive and growing dividend stream.