Top 10 quality AIM dividend stocks for ISA investors

The Alternative Investment Market is a magnet for brave investors seeking out tomorrow's explosive growth stocks. Yet the appeal of London's junior market doesn't necessarily stop there. While AIM is home to hundreds of speculative blue sky companies, it offers some interesting options for dividend hunters, too.

From a tax perspective AIM has become much more compelling in recent years. Investments can now be tucked inside ISA tax wrappers and the 0.5% stamp duty on purchases has been ditched. For those with an eye to the longer term, some AIM shares also benefit from business property relief. So if you hold them for longer than two years, your heirs won't pay inheritance tax on them (although HMRC doesn't provide a list of which shares actually qualify).

While the tax appeal has improved, few would argue that AIM is a safe bet for everyone. A proliferation of natural resources companies and a rabble of unproven or unprofitable business models, means that AIM shares need careful handling. That's especially true for dividend investors, who tend to prioritise sustainable income over the risks of chasing capital growth in small caps.

But there are reasonably high yields out there. And with some rules in place to isolate better quality, financially strong stocks, it's possible to find the ones that look most sustainable.

Hunting high yield

As a first step, the dividend cover outlook offers a guide to companies that can adequately pay dividends from their earnings. Anything less than 1x earnings means that the company is funding payouts from previously retained earnings or, worse still, debt.

Digging deeper it's also important to look for stable, growing, cash generative businesses that produce high returns. Here, Stockopedia's Quality Rank scores and ranks stocks for their long-term profitability and efficiency measures, improving financial strength and lack of accounting red flags.

In our screening of the market, we also considered the trading spread (the difference between the buy and sell price offered by brokers). This is important because spreads of 5% or more are not uncommon among some thinly-traded AIM shares. That can make their high yields potentially too costly to pursue. 

AIM dividend winners

Among the stocks making the list is Cenkos Securities, which happens to be a broker and advisor to a number of small and mid-cap companies. It has a forecast yield of 9.5%, but the lowest forecast dividend cover at 1.1x earnings - so any downturn in corporate deal-making and advisory work could put it at risk.

Cenkos is followed by sports betting and gaming company GVC Holdings, with a forecast yield of 7.9%. A strong operational performance last year, helped by the FIFA World Cup, resulted in GVC paying additional special dividends. The downside is that those payouts are declared in Euros, so the impact of exchange rates needs to be watched.

Fund management firm Polar Capital comes in with a prospective yield of 6.7% and one of the highest Quality Ranks here of 96 out of a possible 100. It's followed by NAHL (NAH), a consumer marketing company working in the personal injury sector (its main brand is National Accident Helpline). The company floated on AIM last year and has a forecast yield of 6.5%.

Also on the list is spread betting company Plus 500 (PLUS), offering a forecast yield of 5.8% and the slimmest spread at just 7 basis points. Perhaps the best known consumer name here is wine retailer Majestic Wine, on a 5.0% forward yield. Finally, the best forecast dividend cover, at 3x earnings, can be found at Finsbury Food Group, a supplier of bakery items to grocery chains, with a forecast yield of 4.1%.

Focus on quality income

The AIM market has generally had a very bad run since 2000, cementing its reputation as being highly speculative. Yet there have been some great long-term winners and stocks that have flourished to the benefit of their shareholders. For any investor hoping to capitalise on the tax benefits of owning AIM shares and reaping the high yields that can be found, quality is key. Detailed research is crucial - but if you dig deep there could be some good quality, high yield stocks that are worth a closer look.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ed Page Croft of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

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About the author

Ben Hobson is Strategies Editor at Stockopedia.com. His background is in business analysis and journalism.

Ben writes regularly on investment strategy performance and screening ideas for  Stockopedia. He is the author of several ebooks including "How to Make Money in Value Stocks"