How to Start Pocketing Dividends with Small-Caps
by Marc Lichtenfeld, Investment U Senior Analyst
Saturday, August 15, 2009: Issue #1067
If you’ve unfamiliar with my prior columns, you might not know that I focus primarily in the small-cap space – both in my specialist areas of healthcare and biotech and other sectors, too.
Typically, small-cap stocks purchased for capital appreciation and big gains more so than they are sought for dividends income.
But I’m actually a big fan of dividends, and the stability of the income they bring as well.
So is there a way to keep an eye on growth and earn solid, steady income at the same time? Usually, the two don’t go hand-in-hand – especially not in the small-cap sector.
But that doesn’t mean to say that it’s impossible to grab the best of both worlds.
There is a way to load your portfolio with outstanding profit potential and generate income too. Here’s how I found them, and three stocks that are perfectly suited to do the job.
Digging For Dividends
I’m not a market timer so I’m not going to tell you that now is the time to get out of equities before the market turns lower.
But what I will say is that with the Nasdaq and Russell 2000 (small-cap) indexes having blasted off their lows by 58% and 67% respectively, it makes sense to get a bit more defensive.
The reason is two-fold – and very simple: Owning dividend-paying stocks generates income and improves a portfolio’s return over the long-term.
However, it’s hard to find good small-cap companies that pay dividends. Smaller companies usually pour any excess cash back into the business to help it grow, rather than distributing it back to shareholders.
In fact, of more than 7,400 stocks with market caps under $1 billion, only 1,356 pay dividends. And if you want a meaningful dividend yield – let’s say 3% – the number decreases to less than 800.
I further whittled down the list to companies with high current ratios, low debt, and profit expectations to help ensure that dividends would continue to get paid.
I also stayed away from companies that paid a very high dividend. Companies with yields approaching 10% or higher may find those payouts unsustainable if business continues to be difficult.
Yes, if you want a higher potential reward, you do need to take on more risk. But buying stocks with sky-high dividends is riskier than those with solid but more sensible yields.
Here are three of the best from my small-cap dividend stock screen…
A Trio Of Small-Cap Dividend Stocks
- WD-40 Company (Nasdaq: WDFC):
The company makes everyone’s favorite industrial lubricant – WD-40 – plus household cleaners and other products. Through the first nine months of its fiscal year, it generated $18 million in profits and boasts $36 million in cash versus $21 million in debt. Earnings per share are expected to grow 13% in fiscal 2010.
Current dividend yield: 3.4%
- American Ecology Corporation (Nasdaq: ECOL):
The firm handles America’s hazardous waste. Not a great business if you’re the guy with the rubber gloves moving barrels of the stuff. But not bad if you’re an investor – particularly a new one, given that the shares have endured a beating over the past year. ECOL is profitable, has $24 million in cash and no debt. Over the first six months of 2009, it generated $17 million in cash from operations. So far it has paid out over $6 million in the form of dividends.
Current dividend yield: 4%
- CDI Corporation (NYSE: CDI):
The company provides engineering and information technology staffing services. With so many businesses cutting jobs, it’s had a tough time over the past year. But it’s still profitable, with earnings per share expected to nearly double next year. It has $77 million in cash, no debt and generated $10 million in cash from operations.
Current dividend yield 3.6%.
If you have any small-caps paying dividends in your portfolio, use the “Comments” link below to let me know which ones are your favorites and I’ll run a follow-up column, featuring stocks sent in by readers. Be sure to tell me why you like the stocks, too.
Hoping your longs go up and your shorts go down.
Marc Lichtenfeld
Related Investment U Articles:
- Why Levered Cash Flow is Crucial for Picking Reliable Dividends
- Can Your Company Afford to Pay its Dividend?
- Finding Foreign Dividends in Exotic Locales
- Want to Profit? Chase Track Records
- How You Might Grab a Cool 16% Per Year… Even While Underperforming the S&P
14 Responses to “How to Start Pocketing Dividends with Small-Caps”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
Smaller organizations with growth and dividends – HTE – Harvest Energy Trust – pounded currently, but seemingly pragmatically and flexibly managed. Will bound way beyond the $1B Mkt Cap as global GDP comes back. BGF – B&G Foods – a portfolio of comfort foods with growing revenues and pricing power.
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You might want to review B&G’s dividend policy. Basically, it says that if they make money they will pay a dividend, if not… They say the policy is a variable dividend policy.
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Great article. Is there an ETF that tracks the 100 fastest growing publicly traded companies? That would be a wonderful one to own a few shares of.
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Check out AMSWA. A market cap of less than $200 million, no debt and pays a dividend of 5.7%. My only complaint is the low insider holdings, but you can’t have everything. Stock is about to make a new 52 week high.
Thanks
Bob
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Thanks for the opp to follow up on small caps.
I think you guys are on the ball. I missed
Teppco, but I bought WIn, waiting for it to
show some muscle, please consider an update……
I also owned TSYS, pays a nice dividend, but it
never seems to want to go over 10. any ideas?
With all the teens texting , this should be
a powerhouse.
thanks,
Mike D
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thanks, so much marc
as a senior, who’s had the income trust rug pulled out from under him, by the very same canadian government that promised ‘if elected – they weren’t going to touch ‘em’ – I very much appreciate learning how (with the right companies) one can still (at a reasonable price) be somewhat ahead of the game.
Al Chilton
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Check out WIN. I’m happy w/the return & the higher dividend.
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In regards to dividends, most closed end funds pay very high returns with some degree of safety.
I don’t see you mentioning these funds at all.
Best Regards,
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I like to get shares that are under 1 USD, that are now at least 7 till 10 times lower than in the last 2 years. I look also that the chart shows soon a strong move up posibility.
I like to buy at least 10.000 shares of each, especting a posibility with those reach to a 100.000.-USD in each share in the midium term of +/- 2 years
WHERE CAN I DOWNLOAD THE BEST INTERACTING LIVE CHART TOOL TO ANALIZE POSIBLE MOVES???
From Buenos Aires
BEST REGARDS
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Send me the answer.
Thank You
Walter
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Iowa Telecom (IWA) has been in my portfolio for over a year. Even though the price of the stock has dropped, along with the whole world, it’s dividend has remained the same and it’s earnings seem to be holding up with recent acquisitions. Current yield is 13.5%
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Thanks for the 3 stock leads. They seem to be solid companies offering great products and services.
Here are 3 stocks among several that I have and like that appear to pay good dividends have solid track records and offer good products and sevices. NLY, PAYX, VOD.
Please check them out.
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Thanks for the freebies Marc, I definitely think your picks have a durable competitive advantage over their rivals. Personally, I am bullish on Meridian Bioscience(VIVO) and Patterson UTI Energy(PTEN)… For the past five years VIVO has had gross profit margins exceeding 59% whilst operating expenses have been been declining substantially. It has huge cash reserves of $49 million and no long term debt. Good will and retained earnings have been growing steadily. Managements ability to efficiently increase shareholder wealth as measured by Return on Equity(ROE) has increased considerably over the last five years. Presently ROE is 23%. I also like the fact that VIVO has a proven record of buying back is own stock and increasing its dividend. Patterson UTI Energy(PTEN)is simply piquant; high gross profit margins coupled by minimal operating expenses. It has super cash reserves of $81 million and no long term debt on its books. Moreover, ROE is 12% and debt-to-equity stands at at a ratio of 0.17, hence for every dollar of shareholder equity PTEN has, it also has 17 cents of debt. Not bad at all. Cheers mate!
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I have held Vector Group (VGR) through the past two turbulent years. Good dividend and has held up
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