dividend investing for small cap investors
TRANSCRIPT
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Hi, My name is Aaron and I‘m with Dividend Stocks Research, today were
reviewing our recently published article…
Why bother with small cap stocks if you’re a dividend investor?
Aren’t all the best dividend stocks the S&P 500 Dividend Aristocrats?Not always. And here’s why.
You’ll definitely play it safe when you go with one of the Aristocrats. Their track
record of paying growing dividends for at least 25 years is a great clue to how the
stock will perform in the future.
But the best stocks for dividends don’t always come with big names. And small cap stocks can make a big difference in
your portfolio.
Small cap stocks are just what they sound like. Their capitalization, the worth of the
company based on the price of all the shares outstanding, is fairly small when
you stack these companies up against the S&P 500.
We’re typically looking at a market cap between $300 million and $2 billion.
Why does this matter if you’re looking for the best dividend paying stocks?
For starters, you get a built in advantage over the big institutional investors, the
people who buy and sell stocks for mutual funds and other big pools.
Mutual funds are usually shackled with rules that keep them from buying big
chunks of a company. They don’t want to be too heavily invested in any one
company.
The fund managers are investing huge amounts of money. This means the big money tends to go to big companies so the fund won’t own too much of any one
stock.
Even if a fund manager found a small cap stock he fell in love with, and was
comfortable owning a big percentage of a small company, he would typically need to
file paperwork with the Securities and Exchange Commission.
Filing with the SEC would make this trade public before it even happened. Word would get around, and the stock price would probably shoot up. It’s like the
fund manager is forced to tip his hand.
You and I don’t have that problem. We can swoop in quietly, buy a few shares,
and make money where the fund managers usually can’t.
Here’s something else that’s nice about small cap dividend stocks.
Because they’re not in the limelight, they’re not traded much. They’re thinly
traded, and the low trading volume gives dividend investors like us some nice opportunities to pick up a bargain.
If you ever hear somebody use the term, “thin market,” this is what they’re talking
about.But here’s what can be best about the
lack of attention paid to the small caps by big institutional traders...
There’s usually a disconnect between the price of the stock and the true value of the
company.This disconnect gives you a chance to buy a stock that’s worth $20 for
$15, even $10.
Why?
Because the company is overlooked. It’s true value is ignored.
Small cap dividend stocks like these are just like the terrific hole in the wall
restaurant a handful of locals in the know always go to, but everyone else ignores.
One more thing about small caps.
Over the long haul, they perform pretty well.
Between 1927 and 2007, small caps were up an average of 12% a year. Large caps
were up an average of 10% a year.
The S&P 500 has a baby brother. It’s the S&P Small Cap 600, which was launched
in 1994. It’s a rewarding place to go looking for
some good small cap stocks for dividend investing.
Another place to find good ones is on the Russell 2000 Small Cap Index.
The Russell is the index most often used to track the performance of small cap
stocks.
But let’s drill into the S&P 600 so you can see how to find a great small cap dividend
stock for your portfolio.
And let’s start with the biggest fish in this small pond.
One of the first things you’ll want to look for is
dividend stocks that keep raising dividends.
And when you’ve found some suspects, keep peeling back the layers. Good deals on small caps are out there. But they’re
not always easy to find.
Leading the list of the top 10 stocks on the S&P600 are 3 restaurant stocks...
Jack in the Box $JACK, Buffalo Wild Wings $BWLD, and Cracker Barrel
$CBRL.
I would never buy a restaurant stock. They’re too risky. Public taste is too
fickle, and they have a way of crashing and burning. (You won’t find many
Chipotles.)Remember Krispy Kreme Donuts $KKD?
In 2003, the stock was in the high 40s. Today, Krispy Kreme is in the low 20s, and
it’s still overpriced.So right off the bat, we’ll whittle this list of
10 stocks down to 7.
Next, we need to see if any of these 7 survivors pay dividends.
2 of them don’t... Manhattan Associates $MANH, a tech company, and PAREXEL $PRXL, a health care firm, are tossed off
our list.
This leaves us 5 small cap dividend stocks to check out.
3 we’ll blow off because the yields are too low.
MAXIMUS $MMS pays a microscopic .27% yield. Why bother?
It’s the same story with West Pharmaceutical Services $WST. It pays a .76% yield, and Curtiss-Wright Corp
$CW pays a .72% yield.
So we’re left with two suspects in the lineup. One is a company that’s in the
lawn care business, and the other one is in real estate.
Toro Co. $TTC has a modest 1.44% yield, a low payout ratio of 29%, and dividends
have been growing for 5 years.
You might know this company... it makes lawnmowers and lawn care products,
irrigation systems, and professional grade equipment.
If you play golf, you probably know Toro. It’s been around forever. (Actually since
1914.)
The real estate outfit that made our cut has only been around since 1997.EPR
Properties $EPRis a Real Estate Investment Trust, a REIT.
A REIT is just like a stock.
But instead of owning factories and laboratories, it owns real estate
investments.By law, it needs to pay out most of its profits in dividends. And
REITs often focus on investing in one kind of real estate.
Some might invest in high-end hotels, others invest in strip centers, some others
in office buildings. EPR Properties invests in megaplex
movie theatres and entertainment retail centers.For the past 5 years, it’s been
shrugging off setbacks for a nice runup.
It pays a 5.88% yield and dividends have been growing for the past 4 years.
So that’s how to make dividend investing in small cap stocks profitable. Put some
suspects in a lineup, and get rid of the ones that don’t make the cut.
Put together your own lineup. Go into the S&P Small Cap 600. Check out the Russell 2000 Small Cap Index.Look for healthy, reasonable yield, but
don’t chase yield. Make sure you have a decent P/E ratio.
Shake down the balance sheet, the management, and the future prospects of
the business.
For example...
If you’re convinced that people are going to cut back on going to the movies, EPR
Properties probably comes off your lineup of small cap suspects.
That’s how you find the best small cap dividend stocks.
And remember... because you’re investing in small caps, you’re in a great position to
rack up some nice capital gains with an increase in the stock price.
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