Well-established larger-cap companies are typically the most income-generating investments; however, there are a number of off-the-radar small-cap dividend stocks that offer investors growth potential and cash generation, as well.
The fact is, small-cap dividend stocks have the potential to offer higher yields than their large-cap counterparts. These types of investments also have the potential to provide more upside than large, established businesses. Despite this, smaller companies aren’t typically on the radar of dividend investors.
Of course, it’s important to note that small-cap stocks can add additional risks such as highly concentrated revenue streams and less access to financing. Luckily, a lot of these companies will be sharing their earnings reports in the next few weeks, so if you see a stock of interest in this article, you’ll definitely want to keep an eye out for that.
What to Look for in Small-Cap Dividend Stocks
Although dividend-paying stocks are considered a safe bet, not all of them are the same. In fact, there are some pretty big misconceptions about these types of stocks, particularly in relation to yields.
A lot of investors choose companies with the highest yields, but the truth is, a high yield isn’t always a good thing. While yields can help investors understand how much bang they are getting for their buck, it absolutely doesn’t determine a stock’s value.
A dividend is a percentage of a company’s profit that cannot be invested back into the business, so if a company is paying out high dividends it may not have much room to grow or offer much upside. It can also signal that the company’s share price is sinking and may be in trouble.
Another misconception is that the best dividend stocks to buy are slow-growth companies that offer the aforementioned high yields. Slow-growth translates to boring for a lot of investors, but if they put less focus on the size of the yields, these types of stocks can become a lot more interesting.
In short, investors shouldn’t focus solely on yields, but on the company as a whole.
Small-Cap Dividend Stocks to Consider
As mentioned, there are some fantastic small-cap dividend stocks out there that are ripe for the picking. From the energy sector to real estates to medical equipment, here are some of the companies investors might want to consider scooping up.
If you’re interested in the energy market, Archrock Inc. (NYSE:AROC) might be a good option with its current yield of 5%. The company is a midstream energy player that compresses oil and gas after it’s been extracted and processed, but before it’s handed over to the end-user. This means that Archrock is fairly immune to fluctuating gas prices and has had a consistent stream of clients.
Another one of the small-cap dividend stocks to consider in the energy sector is NGL Energy Partners (NYSE:NGL). The company, which transports crude oil from producers to refineries and liquid natural gas storage solutions, offers an 11.1% yield.
Office Properties Income Trust (NASDAQ:OPI) is a real estate investment trust (REIT) that has the potential to offer impressive returns. The company offers an 8.4% yield and has been given a consistent “buy” recommendation from B.Riley FBR analyst Bryan Maher.
Landmark Infrastructure Partners (NASDAQ:LMRK) is also in the real estate sector but is completely different than other small-cap dividend stocks in this industry. The company acquires and develops properties that feature billboards, communication towers, and renewable power structures such as wind turbines—all of which offer a steady stream and income and, in turn, a regular flow of dividends. Landmark has tripled its dividends since going public in 2015, offering a current yield of 10.3%.
Patterson Companies Inc. (NASDAQ:PDCO) is a medical supply distributor that provides equipment for both dental and veterinarian offices. The company’s current yield is 5.3%. Although this dividend stock is not in the high-growth arena, it offers reliable growth. This company, in particular, could see some major growth in the future, as both the dental and vet industries are expected to grow.
If tech is your thing, Pitney Bowes (NYSE:PBI) is a dividend-paying IT stock that offers business intelligence, software, and e-commerce services. The company has a current yield of 11.45% and has maintained a high gross margin for the last 10 years since reinventing itself from a paper mail service to an IT firm.
There is also TESSCO Technologies Inc. (NASDAQ:TESS), a wireless communications product supplier that has been expanding its revenue base. This small-cap company offers an attractive yield of over 4.5% and provides a quarterly dividend of $0.20 a share.
Small-Cap Dividend ETFs
For those who are interested in investing in exchange-traded funds (ETFs), you’re in luck; there are several ETFs that are focused on small-cap dividend stocks.
One of these is ProShares Russell 2000 Dividend Growers ETF, which focuses exclusively on companies in the Russell 2000 Index that have grown dividends for a minimum of 10 consecutive years.
Then there is the WisdomTree US SmallCap Dividend ETF (NYSE:DES), which tracks small-cap dividend stocks in the US equity market. The fund includes stocks from several industries, from consumer defense to healthcare to financial services to energy and has over $2 million in assets.
WisdomTree also offers the WisdomTree US SmallCap Dividend Growth Fund, which has increased by 17.46% year-to-date. Investors interested in WisdomTree Investments, Inc. (NASDAQ:WETF) ETFs should keep an eye out for the company’s upcoming earnings report.
Or you may consider the Principal US Small Cap Multi-Factor Index ETF (NASDAQ:PSC), which tracks companies on the Nasdaq US Small Cap Index that have high shareholder yield, momentum characteristics, and pricing power. The fund paid its quarterly dividend of $0.109 per share earlier this month, which represents a $0.44 annualized dividend and a yield of 1.4%.
Some of the other ETFs that focus on small-cap dividend stocks are FormulaFolios Tactical Growth ETF (CBOE:FFSG), Hartford Multifactor REIT ETF (NYSEARCA:RORE), and First Trust Small Cap US Equity Select ETF (NASDAQ:RNSC).
Are there any small-cap dividend stocks on your radar? Let us know in the comments!
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