A Different Type of Gold Stock That Pays 9% Annually

By wyatti@bfpublishing.com (Ian Wyatt),

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Value investors prize stable dividend paying stocks above all others. Let's be honest, value investing doesn't mean taking unnecessary risk, and it doesn't mean wondering if the dividend check is in the mail. It means the dividend stream flows quarter after quarter - no questions asked.

So when I tell you I have a high yielding small cap stock that is worth your money, your first question should be, "How stable is the dividend?" Your second question should be, "What are the risks?"

If I don't answer both to your satisfaction, then I'm just wasting your time.

I've found a gold stock like no other gold stock out there. It's a micro-cap company, it's paying out 9 percent in annual dividends right now, and it's virtually unknown - except of course by a small group of institutional investors that own 17 percent of outstanding shares.

When you buys shares in this company you'll be investing alongside some of the most well know names in value investing - including The Vanguard Group and the California Public Employees Retirement System (CALPERS).

What's more, this company is selling at a big discount because the risks appear higher than they really are. Why? Because it suspended its dividend when the recession hit. Strike one right? Well, not really. The reality is that this company is vastly different from the one that suspended its dividend when chaos struck - otherwise I wouldn't waste your time discussing it today.

Let's put this potential investment in context...

A 6 month Treasury yields 0.18 percent and a 30-year Treasury just 3.75 percent. The traditional "safe" investments - treasuries, money market funds and corporate bonds - are weaker than ever as investors flock to these safe-haven options.

But 'safe' isn't the first word that comes to mind when I consider investments with such meager yields. Especially when there are plenty of solid small cap companies humming along under the radar, rewarding their shareholders with juicy dividends.

The high yield small cap I've uncovered has a market cap just under $110 million. It is a leader in the relatively obscure business of collectibles, memorabilia, and authentication - but while this company flies under the radar of Wall Street its brands are anything but obscure in their respective niche markets.

If you own rare or collection-grade coins, stamps, cards, or other memorabilia items they were probably authenticated or valued by this company at one point. As popularity for these types of 'alternative' investments grows, so too does the need for this company's services - and its revenues.

This company profits from coin and collectable memorabilia trading activity , not by actually trading these items itself. In the very best of times there is plenty of trading activity as individuals look to build their collections. Inversely, in the worst of times trading volume remains as individuals liquidate collections. This company prospers in either climate.

And right now, there is one trend that is helping to propel trading volume for this company - rising gold prices. As you can see in the chart below gold has remained well above $1000 an ounce for almost a year, and has just recently surged above resistance at $1250 an ounce. With gold prices rising, trading in gold coins has jumped.

Compared to the year earlier quarters, this company's coin grading business grew by 28% in the third quarter of 2010 and by another 22% in the fourth quarter.

The surge in gold prices, and in demand for gold coin authentication services, has propelled this company's stock over the last year too. The chart below shows this stock's performance in blue, as well as the price performance of gold in red.

If you had purchased shares at the end of 2009 (like the company's CFO did), your investment would have already grown by over 50% - and you would have collected the fat yield.

Now - more about this dividend, and why the company is selling at a discount.

This company made the difficult decision to suspend its dividend in September of 2008 to preserve its capital during the credit crisis. But the real reason for the cut was a tanking precious gemstone business. When the depression hit, gemstone trading fell through the floor - and so did this segments revenues.

But the company has since discontinued its capital-intensive and less profitable precious gem grading business, and returned its focus to core (and highly profitable) business activities.

What's more, the Board reinstated a $0.25 per share dividend in 2009 - then subsequently increased it to $0.30 cents per share.

With a renewed focus on what works, and less on what doesn't, this high yielding 'gold' company is back on track. It recently reported that fourth quarter revenue increased by 11% year-over-year and that gross margins increased 5 percent, to 63 percent.

This company is flush with over $20 million in cash, has zero debt, and recently bought back nearly 19% of shares outstanding, indicating management's belief that its shares were undervalued.

Naturally, there are greater risks when investing in a company with a market cap under $3 billion and a 9 percent dividend - especially when this investment is compared to a 6-month Treasury.

But understanding those risks, and buying the right companies at the right time, is what being a true high yield value investor is all about. I've uncovered a great opportunity here (actually two opportunities) that are worth your attention.

To learn more about these two high yield small cap companies, including their ticker symbols and price targets, click here . You'll be invited to sign up for a risk free trial subscription to Small Cap Investor PRO. You will also receive my Special Report that includes this high yielding specialty 'gold' stock, as well as another high potential small cap value stock.

Treasuries are yielding next to nothing, and select stocks like this one are yielding over 9%. For small cap value investors, the choice should be clear.

Once you sign up, drop me a line and tell me how you like my report. My address is editorial@SmallCapInvestor.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Stocks
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