Most FTSE shares have had a stable run within the first half of 2025. Most of the UK’s largest corporations have delivered share price features of greater than 50%, helped by stabilising rates of interest, easing inflation and recovering confidence within the UK market. In consequence, among the hottest dividend shares on the FTSE 100 have seen their yields drop as costs have surged.

However small-cap FTSE shares typically lag throughout early bull markets. Buyers are inclined to favour established blue-chips first, leaving smaller corporations trailing. This slower restoration can generally create alternatives to select up shares with enticing valuations and yields earlier than the broader market catches on.

One inventory that not too long ago caught my eye is Victrex (LSE: VCT). After falling 32% over the previous 12 months, its dividend yield’s shot up to a tempting 7.5%. Naturally, I needed to dig deeper to grasp whether or not this could possibly be a chance — or a worth entice.

Area of interest enchantment

Victrex is a small-cap FTSE speciality chemical compounds firm with a market-cap of £690m. It’s a world chief in high-performance polymers, notably polyaryletherketones (PAEK), that are utilized in every part from aerospace to electronics and medical gadgets. These are essential supplies in high-spec engineering functions, giving it a robust area of interest.

Financially, the story’s blended. Income’s grown modestly, rising 4.7% 12 months on 12 months, however earnings development has really declined by 3.8%. This factors to some margin pressures or rising prices within the enterprise.

The dividend yield, at 7.5%, definitely appears to be like attractive. It has additionally been a reliable earnings payer, sustaining dividends for over 20 years. Nevertheless it comes with a catch. The payout ratio at present sits at 174%, which means it’s paying out excess of it earns. Whereas this is likely to be supported by wholesome money reserves for now, it’s not sustainable eternally.

Low debt, excessive valuation

On the optimistic aspect, Victrex’s stability sheet appears to be like stable. The corporate has simply £66m in debt towards £433m in fairness, and it generated £83m in working money circulate final 12 months. That provides some reassurance that the dividend could possibly be maintained within the brief time period even when earnings stay beneath stress.

Nonetheless, valuation is the place considerations begin to construct. It trades on a price-to-earnings (P/E) ratio of 23.4, which is excessive for a corporation with shrinking income. Its price-to-sales (P/S) ratio stands at 2.35 and its price-to-book (P/B) ratio at 1.59, each suggesting that buyers are nonetheless paying a premium relative to its fundamentals.

Different concerns

There are additionally broader dangers. Victrex depends on cyclical industries, corresponding to aerospace, automotive, and electronics, which will be susceptible to international financial slowdowns. Any sustained weak point in these sectors may hit demand for its merchandise.

So whereas that headline 7.5% dividend yield may look interesting, I’m cautious. The excessive valuation and stretched payout ratio give me pause. Personally, I’d look elsewhere amongst small-cap FTSE shares.

Morgan Superior Supplies is one such instance. It gives a barely decrease yield at 5.5%, however with a a lot more healthy payout ratio of 69%. Its valuation can be extra enticing, with a P/E of simply 12.65 and a P/S of 0.57, suggesting the inventory’s way more moderately valued.

For now, I’ll maintain Victrex on my watchlist — I’d have to see stronger earnings development or higher valuation earlier than contemplating it for my portfolio.