It's well-known that small-cap stocks are a good place to look for above-average growth. But did you know they can provide substantial dividends, too?
Small caps – typically considered to be companies with market capitalizations between $300 million and $2 billion – tend to be riskier bets with greater potential for price appreciation than their larger-cap peers. But traditionally, they are not known for generous dividends. Some small companies simply can't afford to pay a dividend. And many of those that can instead prefer to invest that cash in growing their nascent businesses rather than returning it to shareholders.
But several small-cap stocks with healthy growth prospects also pay steady, ample dividends. They are less common, to be sure, but they do exist.
The Russell 2000 index is an oft-used benchmark for small-cap performance. Companies in the index have an average market value of about $2 billion. High income production is rare in the bunch, though – of the roughly 865 dividend-paying stocks in the index, fewer than 250 of them yield at least 3% (which is what passes for generous in these days of low interest rates).
Total return comes down to share-price performance plus dividends, so it stands to reason that small caps with strong growth forecasts and sizable dividends should be solid investments over time. And a dividend yield of at least 3% helps mitigate the risks inherent in betting on smaller companies. With that as our starting point, check out five of the best small-cap stocks for growth and dividends.
Data is as of Oct. 11, 2017. Companies are listed in alphabetical order. Analysts’ ratings provided by Zacks Investment Research. Click on symbol links in each slide for current share prices and more.
- Symbol: DSW (opens in new tab)
- Market value: $1.5 billion
- Share price: $19.96
- Dividend yield: 4%
- Analyst recommendations: 4 strong buy, 1 buy, 6 hold, 0 sell, 1 strong sell
- DSW has had its ups and downs over the past four years, but some analysts think the footwear retailer is ready to put its best foot forward.
Zacks Equity Research rates shares at "Strong Buy," noting that the chain could be a top value pick. The stock’s metrics help to make the case, with shares trading at just 12 times forward earnings estimates, which is well below the forward price-to-earnings multiple of 18 on the Standard & Poor’s 500-stock index, according to data from Thomson Reuters. That's a reasonable price to pay for a brick-and-mortar retailer that’s actually expected to expand its bottom line; analysts project DSW will achieve average annual earnings growth of 6% over the next five years.
As with most value picks, investors will have to be patient. Analysts at William Blair, who rate shares at "Outperform," say that investments in DSW's loyalty program, new store layout and in-store technology are just beginning to bear fruit.
- Symbol: CVA (opens in new tab)
- Market value: $2 billion
- Share price: $15.20
- Dividend yield: 6.6%
- Analyst recommendations: 6 strong buy, 0 buy, 0 hold, 0 sell, 0 strong sell
- Covanta is far from being in a sexy business. In addition to offering waste disposal services, it turns solid waste into sustainable energy. But as unappetizing as that may sound, there's no arguing with the stock's tantalizing combination of dividend yield and growth prospects.
Analysts at Stifel rate shares at "Buy" because the waste-to-energy business is highly predictable with strong free cash flow. Free cash flow – or the cash profits a company generates after making the capital expenditures necessary to maintain the business – is what fuels a dividend. While Covanta has been making some big investments to improve itself, by Stifel's estimate, the company should be able to make good on its promised payouts.
Earnings growth estimates are considerable, too. While Covanta is projected to post a loss this year, analysts surveyed by Zacks forecast a return to profitability next year and average annual profit growth of 15% over the next five years.
- Symbol: SCS (opens in new tab)
- Market value: $1.8 billion
- Share price: $15.35
- Dividend yield: 3.3%
- Analyst recommendations: 0 strong buy, 1 buy, 2 hold, 0 sell, 0 strong sell
Wall Street analysts are starting to get a bit cautious on Steelcase, a maker of office furniture that has stuck around for more than a century. However, an expected bounce-back next year, hefty dividend yield and affordable share price make this small-cap stock worth a closer look.
Analysts at Sidoti & Co. recently downgraded shares to "Neutral" (equivalent of hold) because of weak order growth, but they expect Steelcase to roll out a new line of products that will help revenue and margins rebound in fiscal 2019, which begins in February 2018. And on average, analysts project annual average earnings growth of 7.1% over the next half-decade, according to Thomson Reuters.
As such, shares look reasonably priced at less than 14 times analysts’ expectations for next year’s earnings. A seven-year streak of dividend increases only sweetens the pot.
- Symbol: WETF (opens in new tab)
- Market value: $1.5 billion
- Share price: $10.75
- Dividend yield: 3%
- Analyst recommendations: 3 strong buy, 0 buy, 4 hold, 1 sell, 1 strong sell
- WisdomTree Investments – the seventh-largest ETF provider by assets under management – has two powerful catalysts driving shares.
For one, Credit Suisse is bullish on the company's heavy investments in technology for advisors to drive everything from client prospecting to risk analytics to portfolio modeling. The other catalyst is buyout potential. WisdomTree is one of the few independents left in a consolidating industry – PowerShares parent Invesco (IVZ (opens in new tab)) just bought Guggenheim's ETF business – so shareholders shouldn't be surprised if a competitor tries to scoop up this company (and its suite of popular currency-hedged ETFs) at a tasty premium.
Additionally, WisdomTree has an above-average profit forecast, according to Zacks analysts. Earnings are expected to increase at an average clip of 16% a year for the next five years. The broader industry's growth forecast stands at just 11%.
- Symbol: XPER (opens in new tab)
- Market value: $1.1 billion
- Share price: $22.67
- Dividend yield: 3.5%
- Analyst recommendations: 2 strong buy, 0 buy, 0 hold, 0 sell, 0 strong sell
Analysts at Craig-Hallum Capital aren't thrilled with Xperi filing a lawsuit against Samsung over patent violations last month, but they remain confident in the tech company formerly known as Tessera. Xperi is engaged in similar litigation against Broadcom (AVGO (opens in new tab)), which currently isn’t going the former’s way – a German court’s preliminary statement sent XPER shares reeling Wednesday, Oct. 11.
But however these cases play out, the company is well-positioned, analysts say. The risks to the company – which engages in product licensing and semiconductor and intellectual property licensing, among other activities – are increasingly reflected in the share price.
Beyond the legal distractions, Xperi offers an attractive combination of earnings growth and income. Profits are expected to rise at a rate of 25% a year for the next five years in an industry where 12% growth can be expected. And a tough 2017 has shares going for less than 9 times forward earnings estimates while lifting the dividend yield to above 3%.
Dan Burrows did not hold any of the aforementioned stocks as of this writing.
Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
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