When most people think of dividend stocks, they think of big, boring companies like Colgate-Palmolive (NYSE: CL). It’s a $50 billion company with a respectable 2.7% yield, a stagnant stock price and a mundane core business of consumer staples manufacturing.
All good dividend-payers are like that, right?
Wrong. Very wrong, in fact. You can get higher yields — and much higher capital gains — from an overlooked section of the dividend stock market: small caps.
Smaller companies aren’t even on the radar for many dividend investors, but they actually make up the majority of dividend-paying stocks. Almost half of all small caps are dividend payers — and some of them offer higher yields than anything you’d find in the S&P 500.
That’s one reason why small-cap dividend ETFs like the ProShares Russell 2000 Dividend Growers ETF (NYSE: SMDV, blue line) have handily outperformed the S&P 500 (orange line) for the last five years…
Of course, small-cap stocks can be volatile and risky. There’s no denying that. The real secret of small-cap dividend investing is finding companies that are small enough to pay very high yields — but stable enough to keep their dividend growing without letting it get unaffordable.
Our research team ran an extensive screen of the Russell 2000 to find small-cap dividend payers that are in this “sweet spot” of high yields and financial stability. Below, you’ll find the five best stocks out of the whole bunch…
Pitney Bowes (NYSE: PBI)
IT firm Pitney Bowes (NYSE: PBI) doesn’t have the best reputation among investors. The company has lost quite a bit of equity value since its late-20th century peak, as its old core business — paper mail services — has been in decline for decades.
But Pitney Bowes has reinvented itself in the last 10 years as a diversified technology company offering e-commerce, software and business intelligence services. And it’s done quite well in its “second act.” The firm’s most recent quarterly results showed 202% growth in earnings per share (EPS) year-over-year.
Perhaps more importantly, it has held its $0.18 dividend steady for years. That’s a whopping 10.5% yield at current prices — and it only takes up 52% of EPS. That low payout ratio indicates that Pitney Bowes’ astoundingly-high dividend yield is quite safe.
Chatham Lodging Trust (NYSE: CLDT)
Real estate investment trusts (REITs) are perennial favorites for income investors — and Chatham Lodging Trust (NYSE: CLDT) puts a uniquely profitable spin on this trusted business model.
The firm buys small hotel properties and then rents them out to major chains. If you’ve ever stayed in a low-rise location of a hotel chain — think Hilton Garden Inn, Marriott Courtyard, Hampton Inn, etc. — then you may have slept in a Chatham Lodging Trust building.
The REIT has done quite well for itself, too. It has a low price-to-book value (P/B) ratio of 1.1, steadily-growing earnings, and lots and lots of cash. In fact, free cash flow has more than doubled in the last year — an omen of safety for Chatham’s 6.8% yield.
Aircastle (NYSE: AYR)
Jet-rental firm Aircastle (NYSE: AYR) is another stock which has taken a lot of flak (har har) from investors. When the firm went public in 2006, lots of people had a valid question: Who the heck rents an airplane?
As it turns out, a whole bunch of wealthy people and companies do, including more than 85 airlines which regularly do business with Aircastle.
And that shows in the company’s metrics. The firm has an incredibly low P/B ratio — it trades for less than 80% of its book value. And its $0.30 dividend only accounts for 45% of earnings per share.
That means that this 5.65% dividend yield should continue flying high (I’ll stop now) for years to come.
TiVo (NASDAQ: TIVO)
Like Pitney Bowes, TiVo (NASDAQ: TIVO) is a bit of a blast from the past — but it’s still a good investment for the future.
The former VCR-killer has kept up with the post-cable era, launching several streaming apps and moving to a media licensing-based business model.
Those technological upgrades have paid dividends for TiVo… literally. The firm currently trades for just 78% of book value. It has kept earnings rising steadily and has almost tripled its free cash flow in the last year. That means its 6.33% yield isn’t going anywhere anytime soon.
Invesco (NYSE: IVZ)
Fund manager Invesco (NYSE: IVZ) is the only financial services company in this report. Generally, financial firms are too complicated and dynamic to hack it as small-cap dividend-payers.
But Invesco specializes in a uniquely stable and lucrative area of the financial services industry. It manages exchange-traded funds (ETFs), most notably the QQQ Trust (a popular NASDAQ-100 Composite ETF).
This simple but elegant business model has made Invesco a very stable company. It trades for less than 90% of book value and has steadily grown its EPS in the last few years.
What’s more, Invesco’s $0.30 dividend accounts for just 41% of EPS — a comfortable payout ratio which will keep this 6.39% yield nice and safe.
These five stocks have an average yield of 7.14% at the time of writing. The S&P 500 hasn’t paid anything close to that since the 1950s. Today, it yields a paltry 2.04% — less than a third of what you could earn by following the recommendations in this report.
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And this report only scratches the surface of the small-cap investment opportunities our team is constantly tracking. Penny Stock Millionaire editor Alex Koyfman closed four triple-digit gains last year, and he’s got a bunch more on the way this year. Click here to sign up for his trading alerts.
Until next time,
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.