Alexander Green is an analyst, author and speaker whose primary mission is to show investors how to achieve and maintain financial independence. For 16 years, he worked as an investment advisor, research analyst and portfolio manager on Wall Street. He has been the Chief Investment Strategist of The Oxford Club since 2001. He has written several New York Times bestsellers, including The Gone Fishin’ Portfolio, Beyond Wealth, The Secret of Shelter Island and An Embarrassment of Riches.
In addition to directing The Oxford Communiqué (as well as The Oxford Communiqué Pro), he oversees three fast-paced VIP Trading Research Services: Oxford Microcap Trader, The Momentum Alert and The Insider Alert. He also writes for Liberty Through Wealth, a free e-letter focused on financial freedom that has more than 200,000 subscribers.
Finding small cap companies that pay significant dividends is no easy feat. At this stage in a company’s growth trajectory, cash flow is usually either too erratic or immediately put into growing the business.
However, there are those rare small cap jewels that offer sizable dividends – some even have yields in the double digits.
But before we get to those, let’s define exactly what a small cap stock is…
Know Your Caps
The financial industry traditionally uses small cap, midcap and large cap to describe and classify companies. But as the investments have become increasingly specific, so have the definitions. They have now expanded to include nanocaps, microcaps and megacaps.
To calculate a company’s market capitalization, or market cap, simply multiply the share price by the number of shares. (You can find this information on Google Finance or any other stock quote site.) For example, a company with 10 million shares whose stock is trading at $50 has a capitalization of $500 million – making it a small cap.
Compared with large cap stocks, small caps are not as well known – nor are they as widely covered by Wall Street analysts. This gives individual investors the opportunity to find hidden profit potential in lesser-known companies.
Small caps have a history of being some of the first stocks to move upward in new bull markets. Their size enables them to react, make changes and return to profitability faster than large companies can.
Imagine a large cap or megacap company as an oil tanker and a small cap company as a speedboat. You can picture how easy it would be for the small speedboat to change direction and how hard it would be for the big tanker.
But please note too that small caps are more volatile and run into more problems during economic rough patches. As the saying goes, “More risk equals more reward.” Just remember the risk part of that saying if you don’t have a stomach for price swings.
Now, where were we? Oh yes, small cap dividend payers…
Diamonds in the Rough
Aside from master limited partnerships and real estate investment trusts, there are only a handful of small cap stocks that have double-digit yields.
In fact, of the 3,251 stocks with market caps between $300 million and $2 billion, 2,987 pay dividends. If you want a meaningful dividend yield – lets say 5% – that number decreases to 127. And if you want a double-digit yield, you are left with just 32 stocks.
The reason there are very few small cap stocks paying dividends isn’t a mystery. Smaller companies usually pour any excess cash back into their businesses to help them grow rather than distribute it back to shareholders.
So it’s no surprise that typical investors buy small cap stocks for capital appreciation and big gains. Very rarely are they sought for dividend income.
But that doesn’t mean it’s impossible to grab the best of both worlds.
There is a way to load your portfolio with outstanding profit potential and generate income too.
Digging for Discounted Dividend Stocks
Below we have listed the top 10 small cap dividend stocks – these all have exceptionally high dividend yields that can help you collect higher-than-average income. But being under the radar and paying dividends aren’t the only requirements for our list…
For those discount shoppers out there, we’ve narrowed our focus to the best small-cap dividend stocks that trade for $20 or less. One of these stocks is a little bigger than a small cap, but it’s only just over the $2 billion number so it’s still plenty small to net you a solid yield.
Here’s the list…
As you can see in the list above, smaller stocks can deliver high-yielding income payouts that more than rival the typical blue-chip stocks. These small-cap stocks give you exposure to oversized capital gain potential complemented by nice-sized income payments.
Just remember that small caps are usually speculative and volatile, but they often outperform their bigger brethren. Small caps with big yields are rare, so consider these names a starting point for further due diligence.
Good investing,
Kristin Orman
Liberty Through Wealth
