Bigger isn’t always better when searching for dividends.
While it’s important to stuff your portfolio big, stable blue-chip dividend stocks like Coca-Cola (KO) and Procter & Gamble (PG), you can sometimes find good businesses and attractive yields in small-cap stocks.
That’s because in some cases, these small-cap stocks — companies with market capitalizations of less than $2 billion — operate in very niche markets with few competitors, or they have strong penetration, just in a limited regional market.
And because they operate with more stability than their market caps might indicate, they’re also able to pay out a fairly steady stream of sizable dividends.
Investors should always keep in mind that when dealing with small-cap stocks, you’ll often find thin trading volumes, meaning a big trade can dramatically move the stock (in either direction), so use stop-loss orders whenever liquidity appears to be an issue. Also, their relatively small operations occasionally make it difficult to find easy financing, so in times of crisis, weakness can snowball in a hurry.
That said, I still like these three small-cap stocks not only because of their great businesses, but also for their nice dividend yields:
Rocky Mountain Chocolate Factory
Market Cap: $76 million
Dividend Yield: 3.5%
Just about everyone loves chocolate — an important driver for Rocky Mountain Chocolate Factory (RMCF), which has been making chocolate candies and other sweets for more than 20 years.
The company is the brainchild of Frank Crail, whose vision of a small-town confectionery in 1981 now includes a 53,000-square-foot factory on the outskirts of Durango, Colo., and just more than $36 million in annual revenue generated from its nearly 300 global franchisees. Those are revenues that have grown fairly steadily, at about 9% annually since 2010.
Despite a down year on the earnings front in fiscal 2013 — due primarily to impairment costs associated with disposal of its Aspen-Leaf Yogurt line — RMCF managed to generate more than $6 million in net operating cashflow, enough to cover its capex and dividends nearly twice over.
RMCF also has extended its product lineup beyond chocolates and candies. Earlier this year, Rocky Mountain bought a majority interest in U-Swirl (SWRL), a self-service yogurt operator that management believes will improve its organic growth.
While RMCF hasn’t been a rapid grower by any means, it has been a steady dividend payer. Plus, more than $5 million in cash on hand plus annual cash flow of roughly the same amount bode well for the dividend’s future.
New Jersey Resources
Market Cap: $1.81 billion
Dividend Yield: 3.8%
Energy services holding company New Jersey Resources (NJR) is actually a conglomeration of a number of utility-like operations such as New Jersey Natural Gas and NJR Energy Holdings that provides retail and wholesale energy from the Gulf Coast to the Northeast.
Both top- and bottom-line figures for New Jersey Resources have fluctuated a bit as energy prices have bounced around, and in particular NJR was hit hard in 2012 as a result of catastrophic damage to NJR’s distribution systems during Hurricane Sandy. NJR was forced to shut down service throughout a wide swath of its customer base for several months, affecting revenues, and took additional expenses as it repaired damaged equipment.
Even though NJR took a huge hit in cash flow thanks to capex spending in 2012, it still raised its dividend yet again this year to 42 cents per quarter — representing a 35% improvement in the past five years.
That dedication to improving its payout amid a large-scale disaster speaks volumes about the dividend at New Jersey Resources. Yes, NJR still remains a risk because of its relatively small size, but the dividend is about as sturdy as they come.
DuPont Fabros Technology
Market Cap: $1.9 billion
Dividend Yield: 4.1%
Cloud computing is all the rage, but one overlooked factor in the success of the big cloud operators is finding the space to house the hardware and personnel. Well, these big data centers are the centerpiece of real estate investment trust DuPont Fabros (DFT), which acquires, develops and operates data centers across the country.
DFT’s data centers are high-security, specialized centers where the likes of Microsoft (MSFT), Yahoo (YHOO) and Rackspace (RAX) place parts of their operations. DFT operates 10 data centers, totaling 2.5 million gross square feet, and as of the end of the second quarter, it reported the portfolio was 91% leased. All told, the company produced more than $300 million in fiscal 2012 revenues.
Keep in mind that by law, a REIT must return at least 90% of its funds from operations (FFO) back to investors, and DuPont Fabros is making a habit of returning value. Funds from operations have climbed annually, from $56 million in 2008 to nearly $150 million in 2012, helping to fund a steady stream of dividend increases over the same period. Indeed, DFT’s quarterly payout has climbed from 8 cents per share in December 2009 to today’s 25 cents per share.
The future looks promising too, as DuPont Fabros continues to add to its available space in its huge Ashburn, Va., corporate campus. Meanwhile, DFT is expected to improve earnings by 63% this year and another 69% on top of that in fiscal 2014.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long YHOO and MSFT.