More AIM-quoted companies ought to pay dividends in order to attract investors, according to a leading small-cap fund manager.

More AIM-quoted companies ought to pay dividends in order to attract investors, according to a leading small-cap fund manager.

Gervais Williams, head of UK smaller companies at asset management group Gartmore, believes that in the next five years companies listed on AIM will move from offering ‘almost no income’ to generating ‘significant and growing income’.

Adds Williams, ‘Historically the reason you came to AIM was because you could raise capital; you would invest all your gains and grow faster as a result. My view is that hasn’t worked because companies’ share prices have fallen so much that they can’t raise capital.

‘But if you offer a seven per cent yield, growing to ten per cent over three years, the chances are you will see a substantial uplift in your share price, perhaps as much as 50 per cent – then you can raise equity to take advantage of [expansion] opportunities.’

Williams observes that there have been two periods of substantial dividend growth from small-cap stocks in the past 50 years, one in the late 1950s and early 1960s, and another in the 1980s. In both periods small caps outperformed large caps for several consecutive years.

He was speaking at a roundtable hosted by the Association of Investment Companies.