10 best quality dividend yields on AIM

UK stockmarket indices have soared since the EU referendum, and the Alternative Investment Market (AIM) has been no exception. While the heady days of the resource boom in 2007 are a distant memory for London's junior exchange for growing companies, there are signs that the market is on the up - and that good quality income shares can be found. So where can you find AIM's most appealing dividend payers?

This August, the value of the AIM market broke the £80 billion mark for the first time since February 2014. According to analysis by fund firm Fundamental Asset Management, AIM saw new arrivals during the month totalling £197 million. And, since the volatile days following the EU referendum, the AIM All-Share index has bounced by over 18%, taking it to a two-year high at 808 points.

At 22, AIM is maturing and many of its shares hold broad appeal to pros and private investorsOverall, the market is still some way off the £108 billion valuation it notched up in 2007, when speculative oil and mining stocks were in strong demand. Back then there were 1,694 companies trading on the market. These days it's closer to 1,007.

But the recalibration of AIM away from natural resources companies is not necessarily a bad thing. At 22 years old, the market is maturing and many of the shares that trade on it hold broad appeal to both professional and private investors alike.

Indeed, high profile fund managers like Gervais Williams and Giles Hargreave have become huge advocates for AIM stocks, where growth potential and attractive tax incentives make them hard to ignore.

But while AIM is undoubtedly a magnet for small-cap growth investors looking for explosive re-ratings, there are other reasons to invest. A number of profitable AIM stocks have cottoned on to the fact that paying dividends opens the door to City institutions who view dividends as essential if they're ever going to invest.

For onlookers, the presence of a dividend is an immediate pointer to companies that are generating cash and confident about their own future. They're also acknowledging that shareholders need to be rewarded.

With AIM stocks, the risk of falling into a yield trap could be construed as much higherBut income investors know that dividend safety and sustainability is unpredictable in even the largest companies in the market.

With AIM stocks, the risk of falling into a yield trap could be construed as much higher, given the early-stage nature of some of these companies.

This week we've endeavoured to slice through the hundreds of companies trading on AIM to find the highest yields on offer. Crucially we looked for payouts that appear to be well covered by earnings - using dividend cover as a safety net.

And we sieved the list to ensure that the overall quality, value and momentum of the stocks we found was positive. We did that using the StockRank, which scores and ranks companies on these factors - with 0 being poor and 100 being excellent.

The results are a broad mix of AIM stocks led by the online trading company, Plus500, which has a forecast yield of 7.4%. The median yield of the list is 4.1%.

Plus500 is followed by construction firm, Watkin Jones, the gold miner, Pan African Resources and replacement window and door company, Safestyle UK.

Others include internet marketing firm XLMedia, pawnbroker H&T and the concrete flooring specialist, Somero Enterprises.

Aiming for yield

It's important to remember that AIM's army of smaller growth-oriented companies is both an opportunity and a risk for investors. By their nature, these companies can advance very quickly and income investors can benefit from impressive dividend growth.

But these stocks are less resilient when problems occur, which is something that growth investors have to accept. Dividends are often the first casualty when trouble does hit, which means income hunters must tread carefully.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"