6 Small-Cap Dividend Stocks to Buy Now

Otter Tail

• Market value: $2.2 billion
• Dividend yield: 2.9%

Otter Tail (OTTR (opens in new tab), $53.54) is a utility company with a twist. About 75% of its business comes from power generation across a portfolio of renewable and non-renewable sources in North and South Dakota, as well as Minnesota. But the balance comes from a manufacturing and plastics operation. This offers investors a slight hedge against an overreliance on power generation, which can come in the form of price spikes and rate regulation.

For now, that's not needed, as operating income from the company's power generation division in 2020 was up nearly 22% from 2018, notable in a segment not known for double-digit growth. The gain in operating income has come from cost containment and base rate growth. Management is feeling confident and recently raised its earnings per share (EPS) guidance to $3.50 to 3.65 for fiscal 2021, up from its May forecast of $2.47 to $2.62 per share.

The dividend stock has hit new highs every year over the past five years, except for 2020, and is currently trading less than 6 percentage points below its 2019 peak.

Plus, this is one of the small-cap dividend stocks that has steadily increased its annual payout to shareholders every year since 2013. The dividend has grown at a healthy rate of just under 5% for the last five years, with a current yield of 2.9%.

M.D.C. Holdings

• Market value: $3.6 billion
• Dividend yield: 3.1%

Homebuilder M.D.C. Holdings (MDC (opens in new tab), $52.00) has been cashing in on the housing boom that's been underway during the COVID-19 pandemic. The work-from-home mandate and its likely permanence in one form or another, as well as the migration of millennials into their prime home-buying years, have all given MDC a strong hand to play.

MDC sports a hefty 3% payout. And, by some measures, this dividend stock is cheap. The shares are trading at just 5 times the Street's 2022 earnings estimate, a significant discount to the Russell 2000's forward price-to-earnings (P/E) ratio of 27.6.

This differential is notable, since MDC is delivering results typically associated with high-growth stocks. Second-quarter home sales revenue and net income were up 54% and 83%, respectively, over their year-ago levels. On an annualized basis, six-month earnings are running north of 40% over 2020's full-year results.

Sales growth is all well and good, but what's neat at MDC is that the company has been careful with costs and brought more earnings to the bottom line. In the second quarter, MDC saw a 290 basis-point (a basis point is one-one hundredth of a percentage point) increase in its gross margin, which shows how much of each dollar in revenue the company keeps as profit.

MDC is another one of the small-cap dividend stocks featured here that's steadily increased its payout to shareholders. At the current yearly disbursement of $1.60 per share, the company has grown its dividend at a very handsome 17.5% average annually over the last five years. And it seems safe, too, representing just 22% of Value Line's estimated 2021 cash flow per share of $7.20.

ONE Gas

• Market value: $3.9 billion
• Dividend yield: 3.1%

ONE Gas (OGS (opens in new tab), $72.88) was a spinoff from much larger utility ONEOK (OKE (opens in new tab)) in 2014, and today offers natural gas services to 2 million customers in Kansas, Oklahoma and Texas. Shares have more than doubled over the last seven years, and hit new all-time highs right before the onset of the pandemic. Currently, the stock is off about 25% from its record peak of $96 from February 2020.

Last winter's storms produced a spike in natural gas purchases to the tune of $2 billion, which was met with the issuance of $2.5 billion of new debt. This leveraged the company's balance sheet somewhat. Still, it's near-term liquidity is strong with current assets at 1.6 times current liabilities. And of current liabilities, the cash component is more than $200 million. However, recent bond issuances are visible, causing Value Line to reduce its financial strength to B++.

Still, OGS has performed well, growing earnings at about 10% annually since 2016, despite tepid top-line growth. Further, the shareholder payout has improved a very respectable 11% annually over the past five years, and the current yield is north of 3% – healthy compared to other small-cap dividend stocks.

The outlook for ONE Gas is bolstered by its status as the leading gas distributor in Oklahoma and Kansas, with a number three ranking in Texas – all areas with decent growth possibilities.

Further, there appear to be no immediate obstacles to funding the company's working capital and capital spending requirements through 2023, when recently issued debt starts to come due. Although, ONE Gas seems to have ready access to debt markets and should be able to refinance debt coming due.

New Jersey Resources

• Market value: $3.7 billion
• Dividend yield: 3.5%

New Jersey Resources (NJR (opens in new tab), $38.48), a natural gas and clean energy services company, has a fat yield – currently about 3.5% – and is one of the most consistent among small-cap dividend stocks when it comes to rewarding shareholders. The company has continuously paid quarterly dividends since 1952. Better yet, NJR has increased its dividend every year so far this century, a remarkable feat.

This track record is important to keep in mind since shares have gone nowhere for two years and are still below their mid-2019 all-time high of $50. But looking back a decade, share and dividend growth produced a total return of just over 8% annually, or more than double on an absolute basis. The S&P 500 total return over the last decade is nearly 14% annually, but with much more volatility.

New Jersey Resources delivered a loss for its fiscal third quarter reported earlier this month due to COVID-19 impacts, but it is solidly profitable on a nine-month basis. In addition, the company raised its full-year EPS guidance to $2.10 to $2.20, a significant bump from the $1.55 to $1.65 per share NJR forecast at the start of the year.

Historically speaking, New Jersey Resources tends to increase its dividend in September. If history – and the confidence the company's outlook demonstrates – offers a guide, another increase might be in the offing next month.

Flowers Foods

• Market value: $4.8 billion
• Dividend yield: 3.7%

Flowers Foods (FLO (opens in new tab), $22.87), which makes packaged baked goods, has one of the most spectacular records among small-cap dividend stocks, and has made payments to shareholders for 75 consecutive quarters.

And the dividend is healthy, too. Currently, FLO is indicating an annual payout of 84 cents per share, or a 3.7% yield, up from 58 cents per share in 2016. This equates to average annual growth of a very respectable 8.5%.

The pandemic brought much more in-home consumption of Flowers' breads, snacks and pastries. While this was a plus, it may make for tough quarter-over-quarter comparisons as consumers shift more to consuming food away from home.

But Flowers likely has the financial strength to ride this out, with Value Line's estimated 2021 cash flow per share of $1.75 more than twice the dividend payout.

Flowers is acquisitive having completed deals for Canyon Bakehouse in 2018 and Vermont-based Koffee Kup Bakery in June. For investors interested in small-cap dividend stocks, merger and acquisition (M&A) activity might offer a proxy for future growth, as baked goods are highly competitive and gaining market share can be challenging. The Koffee Kup deal is opportunistic, as the latter ceased operations in April.

Sturm, Ruger & Company

• Market value: $1.5 billion
• Dividend yield: 4.8%

Sturm, Ruger & Company's (RGR (opens in new tab), $82.91) position as one of the leading manufacturers of firearms may dampen the enthusiasm of some investors. For those attracted to this segment, the other pure play is Smith & Wesson Brands (SWBI (opens in new tab)). Market cap-wise, the companies are similarly sized, with Sturm Ruger a tad larger.

For income investors seeking small-cap dividend stocks, Sturm Ruger might be the favored choice, if they can handle some variability. In a twist, the company pays out 40% of its profits from the prior period in the form of a dividend. Most companies elect to keep the payout steady, not the percentage of profits that are paid in dividends.

This has worked out for investors in some years, but not all. For instance, the 2018 payout was $1.10 per share, which was a dividend yield of about 2% that year. But, as of RGR's ex-dividend date in May, the company is yielding about 4.8% with an annual payout of 86 cents per share.

For investors who believe that firearms sales will increase, RGR dividend income should keep coming in. To the degree there is a reversion to theme, the above-average dividend may drive share prices higher.

Another plus on RGR's ledger is that the company has no debt. With cash more than twice current liabilities, RGR is highly liquid in the coming 12 months and well-positioned from a capital expenditure standpoint to take advantage of opportunities that may come its way. Value Line is forecasting 2021 earnings of $6.75 per share, a 33% bump over 2020 EPS.