Do you know what a 6-month U.S. Treasury bond is yielding right
now? I do, 0.17%. That's right, less than a quarter of a percent.
To make more than one percent investing in U.S. Treasury bonds you
need to wait 5-years to get your money back - and for your patience
Uncle Sam will pay you 1.58 percent. Wait 30-years and you're
return skyrockets to 3.87 percent.
Let's see, what to do with that extra 1.58 percent on you
capital. Well, if you buy $10,000 worth of 5-year U.S. Treasury
bonds then in September of 2015 you will have $158.00. That's
enough to take the family out to dinner - at least it is today. In
five years who knows.
Why do I bring this up?
It's simple, because investing in essentially riskless U.S.
Treasuries is the exact opposite of what this small cap letter is
all about. Why does that matter? Because by showing you that the
opposite of my advice is foolish, I strengthen my argument for what
I'm about to tell you to do.
But if you don't want my advice, go buy U.S. Treasury bonds
right now, sit back and get ready to feast on your profits in five
years. Hope you're not hungry.
If you want my advice, read on. Because I'm about to tell you of
an opportunity I just uncovered that is virtually guaranteed to pay
you 9 percent over the next year. It's not as risk-free as a U.S.
Treasury bond, but it's pretty darn secure. And who knows what's
going to happen to the value of the dollar over the next five
years. Waiting that long for a paltry 1.58 percent isn't exactly
risk free. I'd even argue that you're not getting paid for the risk
of inflation when you invest in a five year Treasury.
***First, let me put this discussion of yield in context with
the aid of a few charts. This first one is the yield curve
juxtaposed with an eight year chart of the S&P 500. You can see
the yields that I just discussed are indeed accurate. But also note
where the S&P 500 is right now.
My next chart shows the yield curve at the market's bottom on
of 2009 (the red line on the S&P chart marks the date of the
yield curve). Notice anything different? Me neither. The yields on
U.S. Treasuries during the market's collapse were essentially where
they are now. Why? Because as investors flee to riskless assets
yields completely collapse, ultimately approaching zero.
That's where we are today. The yield on any Treasury with less
than 2-years to maturity is a pittance.
Now let's go back in time. The year is 2007, the summer is
winding down, the market is rallying, real estate is still selling,
and everything feels great. Except there is a problem...
The yield curve is beginning to get inverted. Very short-term
Treasuries are yielding more than mid-term treasures - in other
words, long-term debt is becoming less expensive than short-term
debt. Savvy investors recognize that the yield curve is beginning
to show a recession is imminent...
And so it goes - stocks plummet and the yield curve
And for equity investors, the buying opportunity of a lifetime
becomes so mired in risk that they stay clear of the stock market
altogether. What's the prevailing wisdom? Avoid risk, put any
available money into a savings or money market account, or buy
One of the worst periods of wealth destruction scares people
from taking advantage of one of the greatest buying opportunities
in the last 30-years.
****If you're still reading, you're no doubt wondering what this
has to do with small cap stocks. My answer to that question is
When the market plummeted, small-caps led the way as investors
fled from risk assets. And it was painful. But the reverse is also
true - small caps tend to lead when an economy is recovering. In
study after study, the results have shown this statement to be
Advisor Perspectives, a publisher of investing strategies for
financial advisors, answers the question as to why small caps lead
after a recession:
"According to Giuseppe Moscarini, an economist at Yale
University and Fabien Postel-Vinay of the University of Bristol,
employment growth at small firms is faster than at larger
companies early in the recovery period because small firms are
able to capitalize on the slack labor market typically associated
with this point in the business cycle.
As a result, small- and mid-sized firms are better able to
take advantage of the environment and produce stronger gains in
both revenue and earnings.
Second, small caps generally experience steeper declines
early in a recession due to a flight to safety that naturally
occurs, resulting in oversold conditions and under-valued small-
and mid-cap stocks.
Third, smaller companies tend to get a performance boost when
mergers and acquisitions activity increases, which is common
toward the end of a recession when valuations become more
attractive and larger companies look for ways to grow their
Right now, investors are concerned that the economic recovery is
not as robust as previously thought. They hear reports that
earnings growth is slowing down, that revenue growth is not
They are flocking back to Treasuries to decrease risk, and they
earn a pittance of a guaranteed yield.
***But savvy investors believe in the recovery. They know that
the pace of revenue and earnings growth from the bottom can't last
forever. They know that slowing growth would come - and they knew
that when it did they would start buying a select group of stocks.
This group of stocks also pays a yield, but offers the additional
potential for capital gains. I'm talking about dividend paying
stocks, and I believe that now is the time to load up on stocks in
this asset class.
Most people don't think of small caps when looking for dividend
yields - and that's a mistake. Small cap companies that pay
dividends are one the best performing groups of stocks over the
long term. Between 1926 and 2004 small cap value stocks posted an
average annual return of 15.9 percent - in comparison large cap
growth stocks returned only about 9.26 percent.
I believe one of the best moves you can make right now in search
of yield is to avoid low-yielding Treasuries and pursue small cap
value stocks. Look for companies that have a solid track record of
paying dividends, those with strong cash flow, and companies
without excessive debt.
Whichever way the market goes from here, you should be able to
collect that dividend, and potentially see some capital gains as
Now how can I say I can virtually guarantee you a 9 percent
I can because I've uncovered a small cap value stock that is paying
over a nine percent dividend right now. This company went public in
2006 - and has paid a dividend every quarter since its IPO. Already
it has paid out $5.36 in dividends, and it made it through the
recession without cutting a single payment.
Right now this compay's quarterly dividend is yielding over nine
percent when annualized - this is below the average yield of 10.3
percent since the company went public. That means that the stock
price (remember a lower stock price increases the dividend yield,
all else being equal) is lower than the historical average since
going public. But that won's last, the stock will climb, and the
opportunity for a 9-plus percent yield will dissappear.
Right now this company is a screaming buy. It generates cash
flow from more than 7 businesses - each of which is a leader in
their respective niche markets. It's one of the single best
dividend paying stocks out there, in any market cap class.
If you'd like to learn more about this stocks,
and you'll be able to sign up for a risk-free trial subscription to
Small Cap Investor PRO
. You can check out this company in my recent Special Report that
includes two high yielding small cap value stocks. And if you don't
like the service, cancel at no cost to you - but keep the research
reports on these stocks.
Treasuries are yielding next to nothing, and select stocks are
yielding over 9 percent. For value investors, the choice should be
Let me know if you sign up, and if you like my report. My