The Best Small-Cap Dividends for Aggressive Returns

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small-cap stocks - The Best Small-Cap Dividends for Aggressive Returns

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No one brags about being small. Unless maybe you’re stuck in coach on a long-haul flight, where the ability to shrink is what every stressed passenger dreams of being.

But when it comes to stocks, small is what is working and working quite well. So far this year, smaller equities are really outgunning their larger peers. It isn’t even close, actually … for the year-to-date, small-cap stocks as tracked by the S&P Small-Cap 600 Index have turned in a total return of 11.02% compared to the mouse-like gains of the bigger S&P 500 at 2.80%.

There are plenty of reasons for this. Large-cap stocks get lots of attention, which breeds more scrutiny from the financial media. And with that comes the hype and disappointment that results from heightened volatility as the big-name stocks bounce from “darling of the day” to “kicked to the curb.”

And in the current market, with all sorts of concerns over the bluster and potential reality of trade negotiations between the U.S. and its trading partners — bigger stocks are largely in the cross-hairs to be sold or even shorted.

The small fry of the market tends to stay out of the limelight. And they just stick to their knitting, working their businesses and delivering to their often-sticky and loyal investors.

And many of the best of the small caps keep their shareholder loyalty with consistent performance and bigger dividend distributions. And here are three that continue to hold my attention for years as they continue to work well and pay shareholders outsized dividends year in and year out.

I’ll start with Compass Diversified Holdings (NYSE:CODI). This is a $1 billion company that’s set up as an investment company under the Investment Company Act of 1940. This means that it can own investments on behalf of its shareholders without paying corporate income taxes. This means no double taxation of dividends like for traditional big common stocks.

Compass is much like a small version of Berkshire Hathaway (NYSE:BRK.B) in that it buys and owns companies that focus on higher cash-generating businesses. It steps in and buys well-run companies with strong brands in various consumer and industrial markets. It then works with management to build up their companies and when appropriate they sell the companies and move on to other opportunities.

But along the way, Compass gets paid well and passes through the cash in the form of higher dividends currently yielding 8.26%. The stock has generated big returns over the past ten years, seeing a total return of 289.90% for an average annual equivalent of 14.57%. That is nearly double that of the bigger stocks of the S&P 500.

Its companies include 5.11 Tactical, which supplies first responders with durable and protective uniforms. And it also has branded goods like Sterno Products, ubiquitous in keeping food warm at brunch buffets around the planet. And has industrial companies such as Foam Fabricators, which makes the foam that protects consumer and industrial goods inside those cardboard boxes being shipped around the planet.

These and several more all make for a great collection all inside Compass Diversified.

Then there’s Hercules Capital (NYSE:HTGC) at $1.2 billion. This is the alchemist of the technology market. Based in the tech Mecca of Palo Alto, California — Hercules is a venture capital company. It is constantly prowling the garages of its neighborhood looking for kids in hoodies that are bringing the next big disruptive technology that will drive the markets for the years to come.

It then finances their development, taking equity stakes and then works with them to develop their businesses and eventually works with them to be either sold or brought to the public market in initial public offerings (IPO).

It has 350 or so companies in its operation. And it has plenty of now bold-faced names including Sling Media, Ancestry.com and BrightSource Energy.

Revenues are strong and support a very good dividend currently yielding some 9.67%. And returns for the past ten years amount to 272.61% for an average annual equivalent of 14.05%.

And last up is the smallest of the trio with Blackrock Capital Investment Corporation (NASDAQ:BKCC) at $435 million. Blackrock is a company under the umbrella of the behemoth of fund management, Blackrock Inc. (NYSE:BLK). This gives the smaller company easy access to credit and opens doors for it to work its business.

And its business is providing middle-market companies access to capital and financing that have largely gone away from traditional banks that have moved beyond this vital segment of the U.S. business community.

It has a successful management team full of “true bankers” that wear out their shoe leather finding and working with companies to finance and guide them to greater successes.

Plus it generates lots of cash from its lending, with margins that traditional banks dream about for their bigger deals.

And it shares the cash with ample dividends for its shareholders with the current yield sitting at 11.98%.

And shareholders have been more than rewarded with the past ten years resulting in a total return of 98.80% for an average annual equivalent return of 7.11%.

All three show that being small and well-focused can result in bigger dividends and outsized overall returns in the longer-haul.

Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.


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