Investing in small-cap stocks often means facing volatility. Smaller companies are more susceptible to swings in the overall economic environment or disruption in their core business, while blue chips are big, lumbering behemoths that aren’t fazed by much.
So if you believe in the current bull market and economic recovery, you’ll want to consider staking out a claim in small caps.
Think of these picks like small, agile speedboats, and bigger stocks as massive ocean liners. If you’re taking a nice, leisurely voyage across rough seas, then you want to be on the Queen Mary. But if you’re just looking for a fast and fun joyride, small caps are your ticket.
That’s not to say you always have to settle for wild swings and big risks in these little guys, though. There are a number of small-cap stocks that have substantial dividend payouts that add a bit of security and stability to your portfolio. And when you add up the potential share appreciation with a 5% dividend, the total returns can be very impressive.
Here are five such small caps to consider right now: Senior Housing Properties Trust (NYSE:SNH), Two Harbors (NYSE:TWO), AllianceBernstein Holding (NYSE:AB), Aircastle Limited (NYSE:AYR) and Macquarie Infrastructure Company (NYSE:MIC).
Senior Housing Properties
12-Month Return: +26% vs. +14% for the S&P 500
Just as the name implies, Senior Housing Properties Trust (NYSE:SNH) is a real estate investment trust that owns and operates senior living facilities across the U.S. This is the ultimate recession-proof play, since the demographics of an aging baby boomer population is perhaps the only sure thing that investors can count on right now.
Senior Housing Properties owns 369 properties across 38 states that include senior living communities as well as rehabilitation hospitals, labs and other medical facilities. This reliable revenue stream from tenants and patients allows for stability, and the REIT status means that 90% of taxable income is delivered back to shareholders via a plump 5.7% annualized yield.
SNH just held a secondary stock offering in January to raise about $238 million to pay down debt and fund future acquisitions. At roughly $5 billion in market cap, Senior Housing is smaller than bigger senior care and health care REITs out there like HCP (NYSE:HCP) or Ventas (NYSE:VTR). But with fiscal 2012 revenue up about 120% from fiscal 2009, clearly this is an REIT that isn’t content to merely stay sleepy and throw off a dividend.
12-Month Return: +45%
Two Harbors (NYSE:TWO) is one of our Best Stocks for 2013 — and rightly so. It has soared in the past year and is neck-and-neck for the top spot in this InvestorPlace stock-picking contest.
Two Harbors is unique … and a bit confusing. It’s a mortgage REIT, investing in residential mortgage-backed securities (RMBS) and related investments. In other words, this company owns mortgage paper and no property. If you’ve been following anything about the booming housing market and increase in mortgage lending for financial stocks, then you know trading securities in this corner market has been very lucrative.
And with data indicating red-hot demand in early 2013, it remains a seller’s market for homebuyers and mortgage lenders will keep doing brisk business.
Some investors are confused because of the recent spinoff of Silver Bay Realty Trust (NYSE:SBY), which actually owns physical real estate. But make no mistake — the existing mortgage paper business is still going strong. A rate hike from the Federal Reserve could hurt margins, but there remains little chance of increased interest rates in the near future.
Two Harbors just announced a 32-cent quarterly dividend. Yes, that’s down from 55 cents previously — but remember that it just spun off a big portion of its business, so this is not a cut due to hardship. And besides, that 32 cents annualized adds up to a 10.6% yield.
That’s nothing to sneeze at.
12-Month Return: +53%
AllianceBernstein Holding (NYSE:AB) is an investment firm that provides research, investment management and related services around the world. As the bull market continues to gain momentum and investors come out of their shells, companies like AB are going to be front-and-center for the next several years.
And it’s not just U.S. investors that AllianceBernstein serves. The company has operations in 23 countries, from Japan to Germany to the U.K.
The downside risk is that, of course, AllianceBernstein is a very cyclical business. A turn in investor sentiment could result in big-time outflows from its money management operations. Consider the stock remains about 65% below where it was five years ago, before the markets were gutted by the financial crisis.
There’s also the risk that both retail and institutional investors will simply move their money elsewhere to other firms. That’s what we saw in 2011, when the stock went from $22 to a low of less than $12 after it lost accounts with Vanguard and other big names.
But AB has clawed its way back and is just paid its biggest quarterly dividend since 2010. Its strong brand name, lengthy history and massive $430 billion in assets under management mean this company isn’t going anywhere.
Dividend Yield: 4.9%
12-Month Return: +17%
Aircastle Limited (NYSE:AYR) isn’t your everyday airline stock. The company leases almost 150 commercial and passenger airlines worldwide — and by leasing airplanes to others, it doesn’t have to deal with the direct impact of ticketing and baggage prices, fuel costs or freight rates. Clients include Air Canada (PINK:AIDIF), Emirates and South African Airways, just to name a few.
A secular recovery in the economy continues to result in more leasing demand for Aircastle. In February, AYR reported a 99% utilization rate for its most recent quarter, with lease rental revenue up 13%. That was the eight consecutive quarter of top-line growth. Furthermore, fiscal 2013 will boast the company’s largest earnings per share total since before the Great Recession.
In addition to the growth potential, income opportunity is very robust here. Last quarter, Aircastle increased its payout 10%, marking a cumulative increase of 65% in the past two years alone. Also noteworthy is that AYR also has been aggressively buying back shares, so it’s committed to returning cash to shareholders on all fronts.
If there is trouble for airlines, naturally Aircastle will suffer. But as long the airline industry sees continued strength, then AYR is a no-brainer to help them keep up with increased demand as the global economy picks up.
Dividend Yield: 5.1%
12-Month Return: +61%
Macquarie Infrastructure Company (NYSE:MIC) provides “basic services” to a variety of businesses and consumers. It owns natural gas distributors, a 50% interest in a bulk LNG storage terminal, airport service businesses, solar power generation facilities … you name it.
This makes MIC quite an interesting play, because its business is very much diversified. Utilities like this — because that’s essentially what Macquarie is at its core — are very popular with income investors because of their stable revenue stream. But Macquarie continues to find new areas to grow into.
That’s why the company has grown the top line like clockwork since 2009 in the face of a rough market for energy commodities like natural gas. MIC revenue in FY2009 was $710 million, but topped the $1 billion mark in FY2012 for a more than 40% increase just three years later.
Here’s another bullish sign: Just weeks ago, CEO James Hooke bought 13,327 shares of MIC stock at $51.13 per share for a total buy-in of $681,409. When a top executive dishes out that much money amid the stock nearing a 52-week high, that tells you something.
Macquarie doesn’t have a long dividend history but just paid 69 cents last quarter. If you’d rather take the more conservative yield based on the last four consecutive payouts, MIC still has a yield north of 4%. Either way, there’s income as well as growth here.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.