Michael Jennings | April 27, 2015 | 0 Comments
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Why bother with small cap stocks if you’re a dividend investor?
Aren’t all the best dividend stocks the S&P 500 Dividend Aristocrats?
Not always. And here’s why.
You’ll definitely play it safe when you go with one of the Aristocrats. Their track record of paying growing dividends for at least 25 years is a great clue to how the stock will perform in the future.
But the best stocks for dividends don’t always come with big names. And small cap stocks can make a big difference in your portfolio.
Small cap stocks are just what they sound like. Their capitalization, the worth of the company based on the price of all the shares outstanding, is fairly small when you stack these companies up against the S&P 500.
We’re typically looking at a market cap between $300 million and $2 billion.
Why does this matter if you’re looking for the best dividend paying stocks?
Why You Should Look At Small Cap Dividend Stocks
For starters, you get a built in advantage over the big institutional investors, the people who buy and sell stocks for mutual funds and other big pools.
Mutual funds are usually shackled with rules that keep them from buying big chunks of a company. They don’t want to be too heavily invested in any one company.
The fund managers are investing huge amounts of money. This means the big money tends to go to big companies so the fund won’t own too much of any one stock.
Even if a fund manager found a small cap stock he fell in love with, and was comfortable owning a big percentage of a small company, he would typically need to file paperwork with the Securities and Exchange Commission.
Filing with the SEC would make this trade public before it even happened. Word would get around, and the stock price would probably shoot up. It’s like the fund manager is forced to tip his hand.
You and I don’t have that problem. We can swoop in quietly, buy a few shares, and make money where the fund managers usually can’t.
Here’s something else that’s nice about small cap dividend stocks.
Because they’re not in the limelight, they’re not traded much. They’re thinly traded, and the low trading volume gives dividend investors like us some nice opportunities to pick up a bargain.
If you ever hear somebody use the term, “thin market,” this is what they’re talking about.
But here’s what can be best about the lack of attention paid to the small caps by big institutional traders…
There’s usually a disconnect between the price of the stock and the true value of the company. This disconnect gives you a chance to buy a stock that’s worth $20 for $15, even $10.
Why?
Because the company is overlooked. It’s true value is ignored.
Small cap dividend stocks like these are just like the terrific hole in the wall restaurant a handful of locals in the know always go to, but everyone else ignores.
One more thing about small caps.
Over the long haul, they perform pretty well.
Between 1927 and 2007, small caps were up an average of 12% a year. Large caps were up an average of 10% a year.
How To Find Great Small Cap Stocks For Dividend Investing
The S&P 500 has a baby brother. It’s the S&P Small Cap 600, which was launched in 1994.
It’s a rewarding place to go looking for some good small cap stocks for dividend investing.
Another place to find good ones is on the Russell 2000 Small Cap Index.
The Russell is the index most often used to track the performance of small cap stocks.
But let’s drill into the S&P 600 so you can see how to find a great small cap dividend stock for your portfolio.
And let’s start with the biggest fish in this small pond.
One of the first things you’ll want to look for is dividend stocks that keep raising dividends.
And when you’ve found some suspects, keep peeling back the layers. Good deals on small caps are out there. But they’re not always easy to find.
The Big Guns In Small Cap Dividend Stocks
Leading the list of the top 10 stocks on the S&P 600 are 3 restaurant stocks…
Jack in the Box $JACK, Buffalo Wild Wings $BWLD, and Cracker Barrel $CBRL.
I would never buy a restaurant stock. They’re too risky. Public taste is too fickle, and they have a way of crashing and burning. (You won’t find many Chipotles.)
Remember Krispy Kreme Donuts $KKD?
In 2003, the stock was in the high 40s. Today, Krispy Kreme is in the low 20s, and it’s still overpriced.
So right off the bat, we’ll whittle this list of 10 stocks down to 7.
Next, we need to see if any of these 7 survivors pay dividends.
2 of them don’t… Manhattan Associates $MANH, a tech company, and PAREXEL $PRXL, a health care firm, are tossed off our list.
This leaves us 5 small cap dividend stocks to check out.
3 we’ll blow off because the yields are too low.
MAXIMUS $MMS pays a microscopic .27% yield. Why bother?
It’s the same story with West Pharmaceutical Services $WST. It pays a .76% yield, and Curtiss-Wright Corp $CW pays a .72% yield.
So we’re left with two suspects in the lineup. One is a company that’s in the lawn care business, and the other one is in real estate.
Toro Co. $TTC has a modest 1.44% yield, a low payout ratio of 29%, and dividends have been growing for 5 years.
You might know this company… it makes lawnmowers and lawn care products, irrigation systems, and professional grade equipment.
If you play golf, you probably know Toro. It’s been around forever. (Actually since 1914.)
The real estate outfit that made our cut has only been around since 1997. EPR Properties $EPR is a Real Estate Investment Trust, a REIT.
A REIT is just like a stock.
But instead of owning factories and laboratories, it owns real estate investments.
By law, it needs to pay out most of its profits in dividends. And REITs often focus on investing in one kind of real estate. Some might invest in high-end hotels, others invest in strip centers, some others in office buildings.
EPR Properties invests in megaplex movie theatres and entertainment retail centers. For the past 5 years, it’s been shrugging off setbacks for a nice runup.
It pays a 5.88% yield and dividends have been growing for the past 4 years.
So that’s how to make dividend investing in small cap stocks profitable. Put some suspects in a lineup, and get rid of the ones that don’t make the cut.
Your Next Step For Dividend Investing In Small Cap Stocks
Put together your own lineup.
Go into the S&P Small Cap 600. Check out the Russell 2000 Small Cap Index.
Look for healthy, reasonable yield, but don’t chase yield. Make sure you have a decent P/E ratio.
Shake down the balance sheet, the management, and the future prospects of the business.
For example…
If you’re convinced that people are going to cut back on going to the movies, EPR Properties probably comes off your lineup of small cap suspects.
That’s how you find the best small cap dividend stocks.
And remember… because you’re investing in small caps, you’re in a great position to rack up some nice capital gains with an increase in the stock price.
Regards,
Michael Jennings
Note: Michael Jennings writes and edits DividendStocksResearch.com. Sign up for our free dividend reports and dividend newsletter at https://www.dividendstocksresearch.com/free-sign-up. We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.
Tags: $BWLD, $CBRL, $CW, $EPR, $JACK, $KKD, $MANH, $MMS, $PRXL, $TTC, $WST, best dividend paying stocks, best dividend stocks, best stocks for dividends, Russell 2000, , , small cap dividend stocks, small cap stocks
Category: Dividend Stocks To Buy?
