It’s gone largely unnoticed, but small caps have significantly underperformed large caps over the past 12 months. That’s not necessarily a bad thing, but for income investors looking for some new dividend stocks to buy, it’s the kind of detail that should be kept in mind as portfolios are reconfigured.
See, as it turns out, the market’s highest-yielding dividend stocks are no longer solely found within the large cap segment of equities. Thanks to their weakness, small caps are now as good of a place (and in some cases, better) to look for dividend stocks.
The numbers confirm the premise.
According to Standard & Poor’s, 324 of the S&P 600’s constituents now pay some sort of regular cash dividend, and the average dividend yield among those small caps is better than 2.2%. It’s a payout rate slightly less than the S&P 500’s dividend stocks, which currently dole out an average of 2.4%.
But, more and more small caps are paying out more and more income. Last year, the S&P 600 Small Cap Index saw 10% of its constituents become dividend stocks, with their average yield improving by nearly 18%.
In other words, small caps are quickly and quietly becoming an overlooked pool of dividend stocks that income investors should be considering.
Here’s a closer look at five income-generating stocks to buy from that segment of the stock market.
5 Small-Cap Dividend Stocks to Buy: Commercial Metals Company (CMC)
The last several months haven’t been particularly kind to steel and metal stocks, and Commercial Metals Company (NYSE:CMC) hasn’t been immune to that weakness. But, maybe it should have been.
Its structure is one that effectively makes it a middleman (importer, exporter, recycler) rather than a pure steel supplier or a pure steel consumer. Translation: The strength of the U.S. dollar isn’t crushing CMC the way it it’s weighing down other U.S. names in the steel and metal business.
In that light, all of a sudden that yield of 3.1% makes CMC one of the market’s more compelling dividend stocks to buy. Though Commercial Metals Company hasn’t increased its quarterly dividend of 12 cents per share when it started paying it in 2008, it’s never not paid it, and it’s been able to afford to pay it from net earnings in every year except one: 2011.
5 Small-Cap Dividend Stocks to Buy: Stepan Company (SCL)
The dividend yield of 1.8% cleaning-product maker Stepan Company (NYSE:SCL) presently pays out doesn’t exactly put it at the top of the heap of small caps paying fat dividends, but what it lacks in huge numbers it more than makes up for in reliability.
Stepan has increased its dividend for 47 consecutive years, qualifying it as one of the market’s most reliable dividend stocks to buy regardless of market cap.
The forward-looking P/E of 11.6 doesn’t leave Stepan ripe for any real pullbacks either.
5 Small-Cap Dividend Stocks to Buy: National Penn Bancshares (NPBC)
With just a quick glance at the headlines, it would be easy to draw a concerning conclusion about National Penn Bancshares (NASDAQ:NPBC). Warburg Pincus was aiming to sell its remaining 11.5 million shares of NPBC via underwriter J.P. Morgan, flooding the open market with about 8.3% of the entire float in one shot.
A funny thing happened on the road to dilution though … nothing. The market took it all in stride, with a brief, high-volume dip on the first day of the sale, followed by a complete recovery of the stock’s value before the secondary offering hit the market.
Normally it’s the kind of even that crushes small caps. In the case of National Penn Bancshares, however, the stock’s strength is a hint that would-be investors need to take to heard — current shareholders have confidence in the company, and aren’t worried about the fact that Warburg didn’t want to hold its piece any longer.
It’s that backdrop of confidence behind a yield of 4.1% that makes NPBC one of the market’s top dividend stocks at this point.
5 Small-Cap Dividend Stocks to Buy: Universal Health Realty Income Trust (UHT)
The tax benefits of a REIT and the never-ending need for healthcare? These two trends come together via the Universal Health Realty Income Trust (NYSE:UHT).
Though its growth potential is somewhat capped, there’s an effective floor under that dividend growth as well. Universal Health Realty Income Trust has raised its dividend for 29 consecutive years, and with a current payout of 4.5%, it’s one of the better dividend stocks out there.
5 Small-Cap Dividend Stocks to Buy: H&E Equipment Services (HEES)
Between September of last year and late January, H&E Equipment Services, Inc. (NASDAQ:HEES) shares lost more than half of their value.
It’s certainly not the kind of move that inspires interest in a stock. Then again, a pullback is an opportunity if it wasn’t built to last. And the HEES pullback wasn’t built to last.
While income is apt to fall a bit this year and revenue is only projected to improve slightly, a tumble of that magnitude simply wasn’t merited. Ergo, the pullback is an opportunity, as that same selloff has inflated the dividend yield to a healthy 4.2%.
Income investors should know that H&E Equipment Services has only been paying quarterly dividends since the second quarter of last year. So, it’s arguably the riskiest of the five dividend stocks under the microscope here. The company’s actually got a long history of solid margins and income growth though, so its relatively modest payout of just a little more than half its typical quarterly income isn’t likely to pose a problem.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.