Finding small cap companies that pay dividends is no easy feat. At this stage in a company’s growth trajectory, cashflow is usually either too erratic or immediately put into growing the company.
However, there are those rare small cap jewels that offer dividends, and some yields are in the double digits.
But first, 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. These have expanded to include nanocaps, microcaps and megacaps.
To calculate a company’s capitalization, simply multiply the share price by the number of shares it has. 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. You can find this information through Google Finance or any other stock quote site.
Compared with large cap stocks, small caps are not as well known. Nor are they as widely covered by Wall Street analysts. This allows 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.
To be clear, simply paying a dividend is the norm for small caps. In fact, of the roughly 3,200 stocks with market caps between $300 million and $2 billion, about 3,000 pay dividends. But if you want a meaningful dividend yield – let’s say 5% – that number decreases to about 127 stocks. And if you want a double-digit yield, you are left with only about 30 stocks.
The reason there are very few small cap stocks paying significant 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 about $15. (Oaktree Specialty Lending trades for a bit more than that, but it’s still under $20, and its dividend yield remains incredible at 11%. And while Betterware de México has a lower yield than the rest, it remains a solid stock with a 5.1% yield.)
As you can see in the list above, smaller stocks can deliver high yields that more than rival the typical blue chip stock’s. 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
Research Director, Liberty Through Wealth