Most FTSE shares have had a solid run in the first half of 2025. Many of the UK’s largest companies have delivered share price gains of more than 50%, helped by stabilising interest rates, easing inflation and recovering confidence in the UK market. As a result, some of the most popular dividend stocks on the FTSE 100 have seen their yields drop as prices have surged.

But small-cap FTSE shares often lag during early bull markets. Investors tend to favour established blue-chips first, leaving smaller companies trailing. This slower recovery can sometimes create opportunities to pick up shares with attractive valuations and yields before the broader market catches on.

One stock that recently caught my eye is Victrex (LSE: VCT). After falling 32% over the past year, its dividend yield’s shot up to a tempting 7.5%. Naturally, I wanted to dig deeper to understand whether this could be an opportunity — or a value trap.

Niche appeal

Victrex is a small-cap FTSE speciality chemicals company with a market-cap of £690m. It’s a global leader in high-performance polymers, particularly polyaryletherketones (PAEK), which are used in everything from aerospace to electronics and medical devices. These are critical materials in high-spec engineering applications, giving it a strong niche.

Financially, the story’s mixed. Revenue’s grown modestly, rising 4.7% year on year, but earnings growth has actually declined by 3.8%. This points to some margin pressures or rising costs in the business.

The dividend yield, at 7.5%, certainly looks enticing. It has also been a dependable income payer, maintaining dividends for over 20 years. But it comes with a catch. The payout ratio currently sits at 174%, meaning it’s paying out far more than it earns. While this might be supported by healthy cash reserves for now, it’s not sustainable forever.

Low debt, high valuation

On the positive side, Victrex’s balance sheet looks solid. The company has just £66m in debt against £433m in equity, and it generated £83m in operating cash flow last year. That gives some reassurance that the dividend could be maintained in the short term even if earnings remain under pressure.

However, valuation is where concerns start to build. It trades on a price-to-earnings (P/E) ratio of 23.4, which is high for a company with shrinking profits. Its price-to-sales (P/S) ratio stands at 2.35 and its price-to-book (P/B) ratio at 1.59, both suggesting that investors are still paying a premium relative to its fundamentals.

Other considerations

There are also broader risks. Victrex relies on cyclical industries, such as aerospace, automotive, and electronics, which can be vulnerable to global economic slowdowns. Any sustained weakness in these sectors could hit demand for its products.

So while that headline 7.5% dividend yield might look appealing, I’m cautious. The high valuation and stretched payout ratio give me pause. Personally, I’d look elsewhere among small-cap FTSE shares.

Morgan Advanced Materials is one such example. It offers a slightly lower yield at 5.5%, but with a much healthier payout ratio of 69%. Its valuation is also more attractive, with a P/E of just 12.65 and a P/S of 0.57, suggesting the stock’s far more reasonably valued.

For now, I’ll keep Victrex on my watchlist — I’d need to see stronger earnings growth or better valuation before considering it for my portfolio.