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All Contents © 2019The Kiplinger Washington Editors
By James Brumley
| June 21, 2018
You may not appreciate it. You may not have even noticed it. But small-cap stocks have led the way since the market came out of the subprime slump in 2009.
That lead has widened considerably in just the past few weeks. While the Standard & Poor’s 500-stock index of large-cap stocks is up just less than 3% year-to-date, the S&P 600 small-cap stock index is sitting on a 10% gain, and still going strong.
Concerns of a potential trade war have been pegged as the key catalyst; smaller outfits are presumed to be better-shielded from geopolitical turbulence because they depend less on overseas business. It doesn’t hurt that small-cap stocks collectively beefed up their bottom lines during the first quarter, to the tune of 29%.
This year has injected a new factor into the mix, though – rising interest rates, which have been a blessing and a curse. On the one hand, some dividend-paying small caps haven’t been able to keep up with rising yields. On the other hand, other companies are rising to the challenge of rising rates, improving their payouts in step with the same strong economic growth that’s pumping up interest rates.
Here are 20 of the best small-cap dividend stocks to buy right now. While most smaller companies include a higher level of risk than most blue chips, these companies do stand ready to beef up their payouts as interest rates edge higher, and many of them already deliver substantial yields.
Data is as of June 20, 2018. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price.
Market value: $750.4 million
Dividend yield: 4.1%
American Railcar Industries (ARII, $39.31), as the name suggests, makes railcars. It also does much more than that, also leasing and making repairs to railcars.
Whatever the case, its good fortune relies heavily on a strong railroad market.
That’s been something of a liability in recent years. Between lower-cost trucking options optimized by the growth digital optimization of fleets, railroads partially fell out of favor a few years back. The implosion of the coal market (and volatility of gas and oil prices) didn’t help either. Railroad carload traffic in North America plummeted in 2016 and was only slightly better in 2017.
This year has been considerably different, however, with rail traffic soaring last month to the highest levels seen in the past four years.
That’s great news for American Railcar Industries. The more rail traffic, the more need for railcars, and the greater need for leasing and repair of them. Thus, the stock’s current 4%-plus yield isn’t just protected but poised to improve. Indeed, the company’s cash flow is better ensured than most investors might believe without knowing the details of its revenue mix. Nearly 30% of American Railcar’s top line is driven by railcar leasing, which supplies reliable, predictable recurring revenue.
Market value: $1.9 billion
Dividend yield: 0.9%
Banks are in a sweet spot right now, capitalizing on economic growth at a time when rising interest rates make lending an even more profitable venture. But Eric Pomerantz, advisor with Texas-based Moody Investments, thinks Heartland Financial USA (HTLF, $56.80) is one of the better bank stocks from the largely overlooked small-cap sliver of the industry.
Pomerantz writes that Heartland is a 36-year-old company that’s never booked a full-year loss, adding that it has at least maintained and frequently grown its dividend for the bulk of that timeframe. Its current yield of less than 1% isn’t jaw-dropping, but a low payout ratio of only 14% and expectations for significant earnings growth signal plenty of room for payout growth.
Where Heartland Financial really shines, however, is on the deal-making front. Pomerantz writes, “Heartland has established core competencies in the M & A space,” noting its 12 bank acquisitions announced since 2012, 11 of which have closed. The Moody Investments adviser says Heartland’s banking model is not only attractive to sellers, but shareholder-friendly in that the company keeps its “focus on expanding existing markets” and targets banks with at least $1 billion in assets, looking for “transactions that demonstrate an internal rate of return of greater than 15%.”
The impending end of most of the Dodd-Frank rules will only make mergers and acquisitions among smaller banks even more fruitful.
Dividend yield: 4.0%
It wouldn’t be entirely accurate to say fashion label and retailer Guess (GES, $22.78) sailed right through the retail apocalypse. It didn’t. It wasn’t even close. But, it did win the war of attrition. With so many other brands and shopped venues being forced out of the business (partially or completely), the survivors have a healthy remaining amount of market share to divide among themselves – particularly those names that have embraced that e-commerce is the future.
Such progress was evident in the company’s first-quarter numbers. Guess’ revenues climbed 14.7% year-over-year, the bulk of that growth driven by stronger penetration of European and Asian markets. The crux of the sales growth for those two markets were driven by online sales.
There’s still work to be done, and hearts to be won. The few analysts that still follow the company barely rate it better than a “hold,” and the average target price of $24.75 isn’t much better than the stock’s present value.
However, Wall Street has a knack of missing opportunities among small cap-stocks. And with double-digit earnings growth forecast for this year and next, the dividend of 90 cents per share paid over the course of the past four quarters could grow accordingly.
Market value: $4.0 billion
Dividend yield: 5.8%
Never heard of BGC Partners (BGCP, $12.41)? Don’t sweat it. The company is a brokerage and market data firm, but it doesn’t offer services to retail investors. Rather, it focuses on institutional-level clients like investment banks and the brokers/dealers you are familiar with. If you’ve bought or sold stocks, options, futures or commodities at any point within the last few years, odds are good that BGC had a hand in it without you even realizing it.
BGC Partners also is a real estate middleman and data provider for trading firms and hedge funds.
The core business is a great, albeit competitive, one to be in. But BGC Partners has been doing it for years and can handle it with ease. Revenue is projected to grow a little more than 14% this year, driving a comparable increase in per-share profits. Top- and bottom-line growth is projected to slow next year. But if the economy accelerates on the back of tax cuts and tempered inflation, that outlook likely underestimates what’s in store for 2019.
Whatever the case, this is a “tollbooth” kind of business that’s built to pay dividends. The stock yields nearly 6% right now, and the company has a good track record of increasing that payout in step with growing earnings.
Market value: $579.6 million
Dividend yield: 10.8%
Like BGC Partners, most investors probably haven’t heard of Global Partners LP (GLP, $17.15). Also like BGC Partners, many consumer-investors probably have been customers without knowing it.
As Harley Kaplan, investment advisory representative with Massachusetts-based Beta Industries, explains, “Global Oil is a U.S.-based, family-run company with 1,600 gasoline/convenience store locations,” adding that they’re “worth about $1 million each.” Most are in the northeast corner of the country.
It’s a profitable business, though the description arguably understates the durability of Global Partners’ results. The company also supplies wholesale diesel fuel and gasoline, and serves as a contracted distributor via its terminal network and/or rails.
Yes, the company is a supplier to its own gas stations and convenience stores, smoothing out the inherent volatility of the business.
Most enticing of all, though, is its payout and safety net. Kaplan, who is also a GLP shareholder, writes, “It’s a cash-rich company paying 11%.” By “cash-rich,” he means this side of the MLP – which sports a market cap of $588 million – is sitting on $936 million worth of liquid assets and is more than able to afford the annualized dividend of $1.85 per share.
Market value: $1.8 billion
Dividend yield: 7.8%
Office equipment and software outfit Pitney Bowes (PBI, $9.57) has been a perennial loser since 2014. Shares have fallen every year since 2013 and are down 86% since their 1998 peak. In fact, they’re still knocking on the door of multiyear lows. That weakness reflects deteriorating revenues and profits, too, so the pain is even warranted.
That makes PBI a tough stock to get excited about owning, even factoring in its nearly 8% dividend.
But what if Pitney Bowes was finally on the cusp of a legitimate turnaround?
That may be in the cards. Plenty of risk has been priced in, but the company had a major look-in-the-mirror moment back in 2013, recognizing that “snail mail” was a dying business, while e-commerce was the future. Pitney Bowes initiated a five-year turnaround plan at the time, and although it has taken all five years to produce green shoots, it finally has happened. Revenue is projected to take a small step forward this year, setting the stage for per-share profit growth of 7.6% in 2019.
This isn’t the safest pick. But PBI is priced at less than 7 times trailing earnings, so there aren’t many cheaper speculative stocks.
Market value: $658.1 million
Dividend yield: 9.6%
National CineMedia (NCMI, $8.15) ranks right up there with Velcro, Band-Aids and Post-its as ideas that nobody gives a second thought to, but still make millions of dollars every year. National CineMedia is the primary company that brings you pre-movie trivia questions – and injects an ad every now and then – before the main feature starts at your local movie theater.
It’s a surprisingly big business. Every year, more than 700 million moviegoers file into theaters that have partnered with National CineMedia. Those customers drove $426 million in revenues for NCMI over the past four reported quarters.
There is a bit of drama in play here, though not necessarily bad drama. Activist investment group Standard General LP has successfully added a board member, and likely will be permitted to add another one following a vote at this year’s annual meeting. The aim is to unlock the value of National CineMedia’s business that may not have been fully realized. Sometimes even a modest shakeup like a couple of new board members does the trick.
The company’s nearly 10% yield actually factors in an earlier-year dividend cut from 22 cents per share quarterly to 17 cents. The company will use the savings to reinvest in its products. Meanwhile, Standard General’s presence in the boardroom may grease the revenue wheels a bit.
Market value: $4.3 billion
Dividend yield: 2.6%
Most consumers recognize Penske Automotive Group (PAG, $51.41) as a truck-rental player, but that’s only a small part of its operations. Penske is first and foremost a chain of automobile and commercial truck dealerships. It operates nearly 500 car lots, more than half of which are located outside of North America.
It’s a cyclical business, and the automobile industry is still suffering the ill effects of 2016’s “peak auto” phenomenon. That headwind blows against automakers more than it does dealers, however – particularly when most of those dealerships also offer repair services. Throw in the fact that the Penske Truck Leasing arm is adding roughly $50 million worth of quarterly net income to the mix against a backdrop of a booming economy, and what you’re left with is an organization that isn’t nearly as subject to business cycles as it may seem to be on the surface.
The projected annual dividend of $1.30 per share is well-protected. A yield of just 2.6% isn’t necessarily a show-stopper, but Penske can easily continue to grow that payout as it has for the past several years.
Market value: $4.5 billion
Dividend yield: 2.1%
Graphic Packaging Holding Company (GPK, $14.65) is yet another company that touches your life without you realizing it. It offers packaging and wrapping solutions, primarily for the food and beverage industry. General Mills’ (GIS) Betty Crocker brand, Kellogg (K) and MillerCoors are just a handful of its customers.
It’s not an exciting business, but that’s the point. It’s the kind of business that shrugs off cyclical headwinds, reliably supporting the current annualized dividend of 30 cents per share. The company has earned about three times that much over the past four quarters.
That bottom line (and the corresponding dividend) are poised to grow going forward, too.
Graphic Packaging has been on an acquisition spree. In 2017 alone it bought Seydaco Packaging, Norgraft Packaging and Carton Craft, and more consolidation within the fragmented industry is apt to be in the cards. These deals appear to be not only immediately accretive, but set the stage for synergies that can be realized well into the future.
Market value: $198.9 million
Dividend yield: 3.5%
The implosion of athletic gear retailer Sports Authority – along with many of its peers – against a backdrop of an ever-growing Amazon.com (AMZN) implies that smaller sporting goods players just don’t have a place in the modern market, where scale means everything.
That’s not necessarily the case if that small company is doing practical everything right.
Enter Escalade (ESCA, $13.90), which makes, imports and sells all sorts of sporting goods and equipment, ranging from basketball goals to ping-pong tables to archery equipment and more. Drew Kellerman, founder of Washington-based Phase 2 Wealth Advisors, explains the unlikely success, saying, “Their stable business model has successfully evolved to keep the company strongly profitable as consumer buying trends have shifted online.”
“Over the past five years, ESCA has experienced strong growth rates in both revenue and earnings per share,” he continues. “Furthermore, shareholders are participating in the company’s strong, positive cash flows with a hefty 3.45% dividend.”
Analysts are looking for similar steady-Eddie growth in the foreseeable future, so Escalade’s dividend should continue growing alongside rising profits.
Market value: $2.8 billion
Dividend yield: 7.2%
Outfront Media (OUT, $19.95) may be one of the market’s best-kept secrets despite its unusually healthy yield of 7.7%.
Outfront Media is one of North America’s largest billboard companies, though that brief description doesn’t do the organization justice. Outfront manages a portfolio of more than 400,000 static and digital displays, and has a presence in the United States’ 25 biggest markets. You may have even seen ads its delivers at sports stadiums, subway stations and on your phone.
The business is a little more stable – and a little less cyclical – than you might think. Revenue growth has never grown “like gangbusters,” but the company has generated oddly consistent operating income for the better part of the past five years. That sort of reliability makes for a compelling dividend play simply because the company should be able to continue paying it in the future.
The organization may even be able to grow the payout a little, too. Wall Street’s pros expect $1.06 in per-share profits this year (up from 2017’s 90 cents), and they project a bottom line of $1.13 per share in 2019.
Market value: $940.4 million
Dividend yield: 6.4%
Chatham Lodging Trust (CLDT, $20.55) is a real estate investment trust, or REIT, structured as the optimal way to pass along recurring income to shareholders. But you’re likely more familiar with the hotel chains that use its properties, including Hilton’s (HLT) Hampton Inns and Embassy Suites, and Marriott’s (MAR) Courtyards.
Hotel REITs are practically a commodity, to be fair. But Chatham is a standout, managed about as well as a hotel REIT can be managed. CEO Jeff Fisher has been in the business for more than a couple of decades, and the team surrounding him is second-to-none. The trust’s executives have more than proven they can find opportunities ripe for improvement, then inject those game-changing improvements cost-effectively.
Rising interest rates pose a risk for investments expressly developed to provide income. That concern is part of why CLDT shares pulled back in January and February. However, the same economic strength that’s prodding interest rates upward is also pushing more and more patrons into Chatham’s hotels.
Bonus: Chatham’s dividend is dished out monthly, making the company a nice bill-payer for retired shareholders.
Market value: $1.0 billion
Dividend yield: 6.0%
Owens & Minor (OMI, $17.13), with its 6% yield and its consistent payouts and increases, may be one of the market’s top income-producing prospects that most investors haven’t heard of.
Owens & Minor is healthcare logistics company, taking care of the distribution, inventory and supply-management work that healthcare providers and healthcare equipment manufacturers either can’t do or just don’t want to do. It’s a largely recession-resistant business that will never go away.
The yield hasn’t always been so strong. It’s elevated right now thanks in large part to a 28% setback in early February when the company reported disappointing preliminary numbers for fiscal 2017 and painted a less-than-rosy picture of the future. Expenses are on the rise, and weaker pricing power is crimping margins.
It’s concerning to be sure, but not fatal. The company can fix what’s broken and adjust as needed. Investors saw a glimmer of that progress in the company’s first-quarter results. Meanwhile, Wall Street’s pros still think Owens & Minor will grow its per-share profits from $1.61 last year to $1.99 this year, then to $2.19 in 2019. That’ll keep the dividend going.
Market value: $1.6 billion
Dividend yield: 3.3%
Yes, this is the same Steelcase (SCS, $15.55) that makes office furniture. It also serves the education and healthcare market, opening the doors of opportunity far wider than most investors appreciate. In fact, SCS just announced the acquisition of Smith System Manufacturing – a leading provider for the K-12 market – just a few months after buying office furniture name AMQ Solutions. They’re two of a handful of deals the company has made in recent years, all of which have proven beneficial to the bottom line.
Steelcase isn’t cycle-proof. A closer look at the company’s sales and profits reveals that even with all its dealmaking, the top and bottom lines have leveled off since 2014.
But if the economy takes flight during the latter of 2018 (which Goldman Sachs analysts believe is likely), corporations that have been looking for ways to invest their new tax savings may well make office refurbishments a priority – and a recruiting tool. As it turns out, organizations are now being forced to fight for qualified workers.
Steelcase’s dividend is plenty safe in the meantime.
Market value: $1.7 billion
Dividend yield: 5.2%
A year ago, Aircastle (AYR, $21.29) wasn’t on many investors’ radars, professional or amateur. The ones who were following probably weren’t thrilled with the aircraft leasing and financing outfit. Of the 10 analysts following it in the middle of 2017, nine were content to call it a hold.
But that’s changing now, for the better. Thirteen analysts are now on board, and the analyst community’s collective opinion of AYR is edging higher.
Almeida Investment Management founder Andrew Almeida is among the professionals that have taken notice of Aircastle and its income-driving potential, noting the company has “a long history of rewarding shareholders and raising the dividend” and that “Q1-2018 makes their 48th straight dividend payment.” As for dividend growth, five years ago it was paying an annualized $1.42 per share; now it’s dishing out $2.61 per share.
Almeida also points out that the $100 million buyback plan authorized in 2016 is still mostly incomplete but remains active. He believes the remaining buyback budget of $86 million “should provide future support for the share price while investors continue to collect an attractive yield.”
Fanning the flames of growth for Aircastle is a phenomenal outlook for aircraft demand. Aircraft maker Boeing (BA) says the airline industry will need 41,000 commercial aircraft over the course of the next 20 years, versus only 23,000 in use today.
Market value: $2.1 billion
Brady Corporation’s (BRC, $40.35) roughly 2% yield isn’t exactly earth-shattering, and the wobbly revenue – and subsequently wobbly earnings – between 2008 and 2016 aren’t reassuring. But the company is in the midst of an impressive rebuilding effort that has gone largely unnoticed.
That same rebuilding effort opens the door to dividend-growth possibilities.
Brady makes a variety of labeling, signage and personal identification tools and supplies. It’s a boring business to be in, but it’s surprisingly competitive thanks to low barriers to entry. That’s at least partly why the company has struggled coming out of the Great Recession.
However, as of its most recent quarterly earnings report, Brady has logged four consecutive quarters of organic revenue growth, and income is growing at an even faster pace than sales are (suggesting the company isn’t merely giving its products away in the name of sales growth).
Analysts expect last year’s bottom line of $1.84 per share to grow to $1.99 this year to $2.15 per share in 2019. Don’t be surprised if the current annualized dividend of 82 cents ramps up rather dramatically.
Market value: $930.9 million
Dividend yield: 2.0%
The euphoric stage of pet-mania has run its course. But pets still are a big business – and a growth business – even if the industry’s key players have staked off their turf and all the gaps have been filled.
PetMed Express (PETS, $45.53) is a grounded and firmly founded name in this business. PetMed is the country’s largest pet pharmacy, capitalizing on the craze that’s turned consumers’ love for their critters into an annualized market worth $86 billion in the United States alone. Of that figure, about $10 billion of it is spent on medicines for peoples’ pets. That’s enough to make PetMed Express plenty viable, but not enough to invite a serious would-be competitor into the market to try to chip away at PetMed’s dominance.
More important, PetMed Express regularly shares the wealth with shareholders. The dividend yield of 2% isn’t huge, but the company is expected to grow earnings 24% this year and 13% next, which should keep the payout swelling.
For perspective, PETS paid an annualized dividend of 64 cents three years ago. Now, it’s up to 90 cents, with room and reason to keep rising.
Market value: $5.6 billion
Dividend yield: 5.9%
The backdrop of rising interest rates against economic strength has put the large, familiar banks in the spotlight. And well it should. Higher interest rates translate into wider profit margins on loans, and the nation’s biggest banks also bring plenty of marketing muscle to the table.
Smaller, regional and community banks are enjoying the rising tide of higher interest rates, too. Some are even better-positioned than their large-cap brethren to capitalize on the current economic situation. New York Community Bancorp (NYCB, $11.47) is one of those smaller standouts.
The trailing yield of nearly 6% seems almost too good to be true considering its peers (large and small) aren’t paying nearly as much right now. But there’s important context to bear in mind. That is, NYCB has mostly skipped the rally of the past few years; shares are down 40% since mid-2015, and they reached new multiyear lows just last month. Waning revenues and subsequently fading income are to blame, as is a failed (and also ill-advised) effort to acquire Astoria Financial (AF).
But the tide may finally be turning. Earnings finally are expected to grow this year, to the tune of 19%, and analysts think NYCB’s top line will turn the corner next year, fueling another 5% profit growth. This still is a risky play, but for a yield like this in the financial space, it’s a calculated risk worth taking.
Market value: $2.6 billion
Dividend yield: 5.6%
Triton International (TRTN, $33.62) is one of only a handful of companies that leases intermodal containers.
Intermodal containers are the big metal boxes (9 feet wide, 8 feet high and either 20 or 40 feet long) you’ll see stacked by the dozens on a boat deck, on wheels when being hauled by a semi-tractor, or stacked two high on a flatbed rail car. They make handling large quantities of small-sized goods a snap, as the shipper only must handle one container rather than a few dozen pallets or a few hundred boxes.
It’s a boring business, but it’s quietly the heart and soul of economic growth. While most investors are focused on the goods inside the containers, they’re overlooking the importance and potential of the containers themselves. Big mistake. The use of intermodal containers in North America is now in its fourth year of growth, ultimately driven by an ever-improving economy.
Leasing them is a near-perfect means of creating cash flow, akin to rental real estate. That’s why the current yield north of 5% is not just protected, but poised to improve in step with Triton’s expected revenue growth of 15.6% this year, and 9.4% next year.
Dividend yield: 5.0%
Last but not least, put TiVo (TIVO, $14.55) on your list of small-cap dividend stocks to consider.
Yes, this is the same TiVo that makes cable/DVR boxes for cable television service providers. Given accelerating “cord cutting” movement and the advent of cloud-stored video content delivered on-demand by venues like Netflix (NFLX) and Amazon, set-top boxes and DVRs seem looked doomed products.
That’s not quite the case, though. While the mainstreaming of streaming services that circumvent the cable industry’s hold on delivery of television content also initially rattled TiVo, cord-cutting has identified one of the glaring problems of relying on over-the-air (free) network broadcasts. That is, there is no recording device for over-the-air programming … or wasn’t, anyway, until TiVo leveraged its name to become a pioneer in the receiver-box/antenna/streaming-receiver/DVR market.
Technology licensing rather than hardware sales still makes up the vast majority of the company’s revenue. But, it’s comforting to know that TiVo is ready for the inevitable transition that makes cable companies less and less relevant. In the meantime, recurring licensing and partnership revenue will continue to fund – and likely grow – the stock’s dividend.