You've probably heard it before. Small caps are too volatile.
They're also a great way to lose a lot of money in a short amount
of time. And don't forget, they're usuallyilliquid , making regular
investors vulnerable to the actions of big institutionalfund
managers.
These are the words of the naysayers -- investors who don't
understand that even though companies withmarket caps of less than
$2 billion may be tiny compared to
Wal-Mart (
WMT
)
and
McDonald's (
MCD
)
, many small caps have long histories as industry leaders and
fantasticdividend payers.
Small caps have produced mind-blowing gains in the past 12
years, returning 153% against the S&P 500's 9%. Take a look at
the amazing chart of the
iShares Core S&P Small-Cap ETF (
IJR
) --
an exchange-traded fund (ETF) that tracks the
performance of the S&P 600 SmallCap Index .
But it's not all about capital gains with small caps, because
many also carry sizeable dividends. Almost 100 stocks from the
S&P 600 carry yields of more than 3%. That's better than many
notableblue chips , including
IBM (
IBM
)
, which yields almost 2% and even
Coca-Cola Co.'s (
KO
)
2.7%yield . And because we're talking about small-caps, they have a
better liklihood of growing rapidly, which in turn not only leads
to share price gains, but dividend raises.
[Combining dividends with growth is one part of the
"Dividend Trifecta"
strategy Amy Calistri uses in her
Daily Paycheck
newsletter. Simply put, this strategy multiplies the
effectiveness of every dollar you invest. You can
learn more here
.]
Here are three high-yielding small caps thatoffer a compelling
combination of growth and income.
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Prospect Capital Corp. (Nasdaq: PSEC)
Market cap : $1.86 billion
Dividend yield : 12.5%
Prospect Capital is a privateequity firm with a
monstrous dividend yield of roughly 12.5%. The most
recent round of dividend increases represented the 53rd
and 54th consecutive cash distributions to shareholders,
a testament to this small cap's ability to stay nimble in
different kinds of markets. These dividends and
distributions are complimented by strongearnings and a
compelling valuation, with shares trading at just seven
times forward earnings , almost a 50% discount to its
peer group average of 13.2 times.
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Medical Properties Trust Inc. (MPW)
Market cap: $1.6 billion
Dividend yield: 7%
Medical Properties is areal estate investment trust (REIT)
that specializes in developing, leasing and managing health
care facilities. Some of the highest yielding small caps
are REITs, and that shows up here with the company's
impressive 7% yield. REITs differ from otherinvestments as
they are required to pay 90% of earnings as distributions
to shareholders. With an aging population creating more
demand for health care services, analysts are calling for
earnings growth of 20% in 2013, almost twice the industry
rate of 10%. But in spite of thisbullish growth projection,
Medical Properties still has value, trading at just 13
times forward earnings, a discount to thereal estate market
average of 16 times. |
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B&G Foods Inc. (BGS)
Market cap: $1.5 billion
Dividend yield: 4%
B&G Foods manufactures and sells food products in the
United States, Canada and Puerto Rico. Although this 4%
dividend yield is the smallest of the three stocks
mentioned here, it's still more than twice the return of
the 10-yearTreasury note 's 1.7% yield and ahead of
large-cap food companies such as
Archer Daniels Midland (ADM)
, which yields roughly 2.5%, and
Conagra Foods's (CAG)
yield of about 3.4%.
On the growth side, B&G Foods has been cashing in on
rising demand for food, with earnings expected to climb 29%
in 2012.Shares currently trade at 22 times forward
earnings, but that great dividend makes up for its slightly
high valuation.
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Risks to Consider:
Even though these are well-established companies, small caps
are still relatively more volatile than large andmega caps . Small
capital inflows into large caps during times of market stress can
weigh heavy on companies valued at less than $2 billion.
Action to Take -->
These three small caps are mature stocks with market-leading
positions, strong sales and income growth. When you add in a hefty
dividend, these stocks are a great way to boost yield and go for
long-term capital gains in your portfolio. Small caps such as these
also benefit from being potential takeover targets as larger
companies continue to grow throughacquisition and
industryconsolidation evolves.