Dividend up 10%! A rare small-cap stock to consider for passive income and growth

It’s common for investors to look for passive dividend stocks among large and mid-cap companies, such as those found in the UK. FTSE350 hint.

However, one small-cap company I discovered has a forward yield of over 5.5% and is racking up a decent multi-year dividend record.

Potential for revenue and business growth

Many small-cap companies focus on growth, which often means that available capital is reinvested in operations rather than distributed to shareholders. But this company does both, and that’s rare.

It’s called Bottoms of cake boxes (LSE: CBOX) and operates as a franchise retailer and cake manufacturer. The company is growing rapidly and now has around 225 stores in the UK.

The franchise expansion model is key to the company’s growth and the company does not directly own or operate Cake Box stores.

In some ways, the business model is rather specialized. The cakes are egg-free and the makers believe this has no adverse effect on taste or texture. However, the absence of eggs allows the company to target “a much larger potential market”.

City analysts expect double-digit profit growth in the current trading year through March 2025 and the following year. They also expect the dividend to increase by single digits in both years.

Since 2021 – after the pandemic lockdowns – the dividend record has been impressive. There has been an increase every year and the compound annual growth rate stands at just over 20%.

We almost never see dividend growth as strong as that of larger passive dividend stocks such as national grid, Legal and general and others. So this is one of the main reasons why I think Cake Box Holdings is worth further research and consideration now.

The stock could fit well into a diversified portfolio of dividend-paying stocks. But aside from the potential for increased dividend income, shareholders could see capital appreciation from a rising share price.

The story continues

Can strong growth continue?

However, these results are not certain. The risks are numerous.

For example, the market capitalization is tiny, at around £69 million, and small caps are known for the volatility often encountered in their operations and share prices. A quick glance at the chart shows that this one is no different.

It is unclear when the rate of business expansion will slow. Maybe it will be soon. After all, the scope of operations seems quite narrow.

Will cream cakes lose popularity? Maybe. If that happens, dividends and the stock price could drop like a stone. There is also the possibility that competitors will eat into the company’s market share.

Nonetheless, small-cap companies often find ways to continue growing, and this one has a proven business model. Revenue, cash flow, profits and dividends have all been growing steadily for several years.

There is also a small net cash position on the balance sheet rather than net debt, suggesting growth is well funded.

I’m tempted to continue my research now. But if I buy the stock, I would look to mitigate some risk by reducing my normal position size.

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Kevin Godbold has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed about companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a broad range of information makes us better investors.

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