If you're anything like the average dividend investor, you want
one thing: safe, reliable income. Sure, a large payout is nice, but
at what cost? A high yield means nothing if it's here today, gone
Maybe that's why investors shy away from stocks with a small market
capitalization when looking for income. It's easy to think that,
because a company is relatively diminutive, the payout isn't stable
or the yield is small. In some cases, that's true. In others,
that's a mistake. And investors could pay dearly by losing out on
an entire group of well-paying, and sometimes fast-growing, stocks.
All it takes to get in on the action is a little homework.
The first thing we want to look for is obvious: small-cap stocks
that pay dividends. Technically, these are stocks with a market cap
under $2 billion. For our screening purposes, we'll also put a
floor in at $100 million. Anything under that, and we're getting
into micro-cap territory, which carries more risk than most
dividend investors are willing to stomach. We also want to make the
search for high yields worth our while, so we'll look for yields
But we can't just stop there. It's absolutely vital that a high
yield is justified -- that is, supported by sustainable cash flow
and not on the verge of being cut at the slightest downturn in
business. One simple metric payout ratio .
Say a company earned $500 million in a year and paid out $250
million in dividends. A little simple math (250/500 = 0.5) tells us
that makes for a payout ratio of 50%, meaning the company paid half
of its earnings as dividends. A good payout ratio depends on the
industry, but anything above 100% means a company is paying out
more than it earns. This should set off warning bells, because it
means the company uses cash reserves to meet its current dividend
obligations. That can't last long if business doesn't pick up, and
the company will either continue bleeding cash or it will have to
cut the dividend payment. Neither is particularly desirable.
With these factors in mind, the StreetAuthority research staff came
up with the following screen:
- U.S. stocks with market caps between $100 million and $2
- Dividend yield above 6.5%
- Posted positive earnings last quarter and on a trailing
twelve month basis
- Dividend payout ratio under 65%
Here's what we found:
|Alliance Resource (Nasdaq: ARLP)
|Suburban Propane (
|Global Partners (
|International Ship (
There are two standouts in this table and one obvious red flag.
Internet service provider
Earthlink's (Nasdaq: ELINK)
best days are behind it. Its customer base does churn out enough
cash to support its 6.5% yield with room to spare, but macro
factors are set to crush this small company. The company focuses on
retaining existing dialup customers who have not switched to
broadband Internet access because of either price or availability.
But as the old adage goes, "If you're not growing, you're dying."
Internet service is getting cheaper, faster and it's expanding into
more parts of the world as we speak. Customers are growing to
expect more bandwidth and competitors like
will be all too happy to expand into the areas Earthlink services
and seal this company's fate.
The two standouts from this list are
International Shipholding (
Buckle is a clothing retailer that sells simple, fashionable styles
to the younger crowd, not the high-fashion type of retailer that
might get left out if it misses the mark on evolving trends. When
other retailers felt the hit of lower consumer spending during the
downturn, Buckle turned in solid results in fiscal 2009, growing
revenue and profits. The company has focused on steady growth over
the years and pays out less than a quarter of its earnings, yet
still yields 8.5%. (Note: The bulk of Buckle's payout is in the
form of a "special" dividend based on earnings).
Mobile, Alabama-based International Shipholding is a maritime
transporter with a fleet of 41 vessels that transport everything
form cars and trucks to military equipment. The Baltic Dry Index
dropped like a rock when the economic downturn hit, reflecting the
woes of the shipping industry. The index has staged a comeback of
late, but it could be just the beginning. As for International
Shipholding, the stock carries a price-to-sales ratio of just 0.6
and trades for just under five times earnings, suggesting it is
extremely undervalued. And with a yield of close to 7.0% and a
payout ratio of 34%, the dividend looks to be in good shape,
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.
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