Given that blue-chip stocks tend to be the dominant force in most income portfolios, it can often seem like smaller companies aren’t paying dividends. But even big stock companies had to start somewhere.
Of course, investing in dividend payers isn’t always a guarantee. We need look no further than General Electric or Ford Motor Co to see examples of companies that used to pay big shareholder dividends that have since fallen from grace.
Fortunately, dividends aren’t just paid by big companies, though finding high dividend small cap stocks that also show growth potential can be difficult. Especially if you’re looking for those companies with a relative amount of stability. And you should always be looking to invest in stable companies.
However, smaller companies that pay dividends are generally known to be more volatile options, and in certain instances they also show declining financial results. But stocks like these can also provide growth and income for savvy investors.
It’s true of all investments, but perhaps more so of small cap stocks: make sure you do your homework before buying. Some of those small cap dividend payers offer high payout ratios. That’s because they use high dividend yields to attract investors. But, of course, high dividend yields mixed with decreasing cash flow is never sustainable.
That’s why investors need to conduct a deeper, more thoughtful analysis of a company’s operating results if they’re looking for stocks with long-term growth potential.
All of the companies on this small cap stock list have a market capitalization of less than $2 billion and yields of more than 3 percent annually.
1. Big Lots ($BIG)
Big Lots is a discount retailer that specializes in closeout sales. The company acquires products in bankruptcies or at wholesale lots sold at heavy discounts thanks to overruns.
With around 1,400 stores in the United States, Big Lots is attractive to bargain hunters looking to find a good deal and who aren’t afraid of spending time scouring shelves. A prospect that seems extra appealing in troubling economic times.
Not to mention, Big Lots is largely insulated against competition from e-commerce sites because its deals are not offered online.
This year, the company announced a $725 million sale and leaseback agreement, which strengthened its cash position to fuel stock buybacks and protect its dividend. Prior to the deal, Big Lots was consistently paying 30 cents while the new financing arrangement could cause distributions to grow even higher, making this a small stock dividend to watch.
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2. Archrock ($AROC)
This midstream player in the energy market works in the oil and gas sector. Archrock handles the resources after they’ve been extracted and processed, but before end-users take possession of it.
Archrock takes natural gas and prepares it in such a way that makes it more efficient to handle. Ostensibly, the company compresses natural gas so it can be easily stored, sent through a pipe, or drawn out of a well. It can actually take a tremendous amount of equipment to handle all of this (not to mention, it’s expensive), so many small drillers will outsource the work.
Fortunately for investors, Archrock is largely immune to fluctuations in the price of gas. Moreover, the company’s profits and revenues have remained remarkably stable since 2014.
Meanwhile, consumption of natural gas remains consistent, even if prices rise and fall. That means there’s a similarly consistent dividend. A dividend that currently yields about 5 percent of the stock’s price.
3. Moelis & Company ($MC)
This investment bank offers strategic services to clients who are looking to grow through mergers and acquisitions. The bank also offers the ability to recapitalize and restructure a business if things aren’t going well.
Given that Moelis & Company was founded in 2007, just before the financial crisis hit, it’s obvious that this bank knows about chasing opportunities based on market conditions. That means it can be successful in both good and bad times.
While MC’s revenue sometimes fluctuates between quarters, based on how much business it has done, the last four payouts have been relatively impressive. The current yield of just over 5 percent makes it worth a look for any investor.
4. B&G Foods ($BGS)
B&G Foods might not be a name that is instantly recognizable, but even the most casual reader will be aware of some of its brands. Names like Green Giant frozen vegetables, SnackWell’s devil’s food cookie cakes, Ortega taco shells, and Cream of Wheat, are just a few of the brands this company provides to the world.
Investors likely weren’t particularly happy with the packaged food business in 2018, and B&G wasn’t exempt from the challenges faced by the overall industry. Many bigger names like Mondelez and Hormel have already returned to previous levels, but BGS stock has yet to snap back.
Rather, the company has continued to fall, reaching new 52-week lows in 2019. Then, in December of that year, B&G made a big move, acquiring Crisco. Meanwhile, revenue growth has been solid in recent years, growing at 14 percent over the last five years.
The acquisition will mean leverage will remain high, but the Crisco deal also blesses B&G with around $270 million in net sales.
But it has been acquisitions like the Cisco deal that have caused investors to sour on BGS in recent months. Indeed, the company has been a serial acquirer using debt to finance its deals That has led to a high balance sheet and financial leverage, a situation which often leads to dividends being cut or abandoned entirely.
B&G, though, continues to generate cash flow returns and has seen a boon thanks to a shift in consumer sentiment during the pandemic. Even if trends change, cash flow generation is expected to continue supporting BGS’ dividend. Overall, it looks as though BGS’ dividend will remain in place and the stock may actually be undervalued.
5. Innovative Industrial Properties ($IIPR)
If you had invested $10,000 in IIPR at the beginning of 2020, you would have more than $25,000 today, according to the Motley Fool.
Innovative Industrial Properties is technically classified as a real estate investment trust, or REIT. However, IIPR is also an active small-cap dividend stock thanks to its business model. IIPR works in the legal, for-profit cannabis industry in North America, renting out growing facilities to cannabis farmers.
The firm greatly expanded its real estate holdings in 2020, acquiring 20 properties throughout the year. IIPR now owns 66 properties in 17 states, made up of 5.4 million square feet.
The company went public at the end of 2016, and since then has raised its payout several times. What began as 15 cents per share, was sitting at $1.06 as of July.
While there are certainly many marijuana plays on the stock market, Innovative Industrial Properties avoids trendy movers and shakers for a much safer real estate play. Then the company passes a share of cash received from its tenants on to shareholders.
6. Macerich ($MAC)
Similar to Innovative Industrial Properties, Macerich is also a REIT. What’s interesting about REIT’s is that they’re required to pay out 90 percent of taxable profits to investors.
Macerich’s business is centered on the acquisition, management, and leasing of shopping centers around the United States. Its primary presence is on the West Coast as well as Arizona, Chicago, and the corridor between New York and Washington, DC. The company has an ownership interset in more than 50 locations with approximately 51 million square feet of available space.
While investing in a company whose core offering is centered on shopping centers may seem like a bad idea during a global pandemic, Macerich’s strength lies in the character of its tenants. Tesla, lululemon, and Apple are just a few of the companies paying rent to Macerich. Moreover, the company is making moves to futureproof its business by redeveloping older department stores into new mixed-use projects.
The company’s portfolio occupancy rate has remained steady at 94 percent or above in the last five years. Additionally, dividends and sales per square foot increased each year between 2016 and 2019. All of which show a strong portfolio.
Based on this, as well as the company’s overall operating performance, Macerich could very well be undervalued at the moment. Couple that with the pent-up demand for consumers to return to shopping once the quarantine ends, many analysts expect Macerich to recover. And with its 8 percent dividend yield, that could make Macerich a very attractive investment.
7. PetMed Express ($PETS)
Pet products are largely seen as recession-proof. Moreover, spending on pets has actually been shown to rise during hard times.
In the early days of the pandemic and resulting lockdown, ped adoptions shot up as people looked for companions. This should be a boon for PetMed Express in the long run. This online pet pharmacy may be more familiar as 1800petmeds.com or 1-800-PET-MEDS.
The company calls itself the largest pet pharmacy in the country. Indeed, it boasts more than 2 million customers and is largely considered the leader in online sales in a $5.5 billion industry. The majority of PetMed’s shoppers are repeat customers that will likely continue shopping with the company for years. This reliable source of recurring revenue and lifetime value should make it attractive to any investor. Additionally, the company has historically operated at double-digit operation margins. Continued growth will likely see the company better leverage its operating costs.
The company has paid a dividend each quarter since 2009. For most of those years, the dividend has actually increased. With a current dividend yield of 3.9 percent, it seems a reliable option for recurring income.
8. Calavo Growers ($CVGW)
You may not know Calavo’s name, but it’s almost certain you know their core product: avocados.
Calavo, whose name is a portmanteau of “California” and “avocado,” is a leader in the global avocado industry. An industry that has exploded in the last decade as the fruit has become a healthy option for health-conscious consumers, and staples in dishes like guacamole and avocado toast.
The growing Hispanic population in the United States–expected to double by 2050–is also expected to spur growth in the coming years, given that it’s a staple in many Hispanic households.
Calavo’s share prices have largely tracked the growing popularity of avocados in the last decade, with the stock jumping as much as 400 percent. That’s an extremely rare occurrence for an agriculture business.
However, the Coronavirus pandemic has placed some hardships on the company, which also saw a pull back in 2018 when the price of avocados fell. And because the company grows fruits (it also produces tomatoes and papayas), its shares typically fluctuate with market prices. Despite this, the company has been a reliable dividend payer.
The company pays an annual dividend of $1.10 per share, which last paid out in November
Calavo currently pays an annual dividend of $1.15 which last paid out in November. Up five cents from the previous year. Indeed, Calavo typically raises its dividend by 5-to-10 percent each year. While many investors weren’t expecting a dividend boost this year, due to the challenges of COVID-19, but management reaffirmed its commitment to long-term dividend growth.
The Russel 2000 index tracks small cap companies in the same way that the Standard & Poor’s 500-stock index tracks large-cap stocks.
The index bottomed out in March of this year, but since then has ganed 99 percent, taking just 192 trading days to generate those returns, trumping its previous record of 262 trading days set back in 2009-2010, according to Barons.
That recovery is unprecedented and reflects a huge change in sentiment since the early days of the pandemic.
Small cap stocks that pay dividends aren’t as common as their large cap counterparts, but as this small cap stocks list hopefully proves, small cap dividend growth stocks aren’t complete anomalies.
Indeed, there are a number of small stocks with potential and these are some of the best small cap dividend stocks we could find. But, as always, make sure you do your own research. Companies like this offer a lot of potential upside and may make for reliable revenue streams, but any savvy investor should investigate a company before laying down their hard-earned money.