Income-focused investors often target the largest companies, as those with lengthy track records of dividend growth are usually the leaders within their area of the economy.
Still, investors could do well expanding their search beyond the large-cap names. While larger companies with long histories of dividend growth typically draw the attention of investors, smaller companies are no less impressive in their ability to continue to raise payments to shareholders. Indeed, smaller caps could deliver outsized capital returns as well as dividend income.
Some investors searching for income might ignore small-cap stocks due to their size, but we believe that there are high-quality, dividend-paying stocks with market capitalizations below $2 billion that could prove safe and secure income in retirement.
Three of our favorite small-cap dividend stocks for income include:
| FLIC | First of Long Island | $17.70 |
| PETS | PetMed Express | $21.57 |
| YORW | York Water Company | $43.32 |
First of Long Island (FLIC)
The first small-cap name to consider is First of Long Island (NASDAQ:FLIC), which is a holding company for the First National Bank of Long Island. The $394 million company has generated revenue of $129 million over the last year.
First of Long Island has just over 60 branches, which are primarily located across two counties in Long Island. The company does have branches in Brooklyn, Manhattan and Queens. First of Long Island offers the usual lineup of financial services similar to most regional banks, including business and consumer loans, mortgages, savings accounts, payroll, investment management, mutual funds and life insurance, among others.
While these services are similar to what most peers provide, First of Long Island’s presence in a growing area leads to tailwinds to the business. The company may not attract the largest customers, but First of Long Island does provide services to both small- and medium-sized businesses in the region. Being centered near the financial capital of the world is also a plus in the company’s favor, even if First of Long Island doesn’t have the large-scale advantages that larger banks have.
Aggressive Federal Reserve action on rising interest rates is already providing a lift to results. For example, First of Long Island’s net interest margin expanded 26 basis points to 2.97% in the most recent quarter. Average loans outstanding grew 9.4%, so the company continues to see strong loan demand. Return on equity, which has traditionally been very high for First of Long Island, was 12.57% for the quarter, compared to 10.96% in the prior year.
First of Long Island’s strong business model has enabled the company to provide annual dividend increases for 45 consecutive years. The company is just five years away from entering the ranks of the Dividend Kings, which are those companies with at least 50 consecutive years of dividend growth.
Most recently, First of Long Island raised its dividend 5% for the Oct. 21, 2022 payment date. The dividend has a compound annual growth rate (CAGR) of 7% over the last decade and the projected payout ratio for this year is reasonable at 40%. Shares of First of Long Island yield 4.8%, which is nearly three times the average yield of 1.8% for the S&P 500.
PetMed Express (PETS)
Next up is PetMed Express (NASDAQ:PETS), a leading nationwide pet pharmacy. The company has annual revenue of $273 million and is valued at $452 million.
PetMed Express was founded in 1996 and was originally called 1-800-PetMeds. Today, the company is one of the largest names in the pet pharmacy industry. PetMed Express offers both prescription and non-prescription pet medications directly to the consumer through its toll-free number and website. The company focuses on dogs, cats and horses.
The company’s chief competitive advantage is that it is very well-known among pet owners. PetMed Express has cultivated a wide following over the last nearly 30 years, leading to numerous repeat customers. The tremendous growth of e-commerce has directly benefited the company as more and more consumers use online channels to find the products and goods that they need. This trend is likely to continue, especially following the increase in use during the Covid-19 pandemic.
PetMed Express also offers a wide variety of products, including more than 3,000 medicines, health products and supplies. This allows customers to use the company for all of their pet-related needs. Many people view their pets as part of their family, making it likely that they will go to great lengths to make sure they are taken care of. This occurred during the Great Recession, when EPS grew nearly 20%.
Revenue fell 11.5% in the first quarter of fiscal year 2023, largely due to a delay in the company’s seasonally sensitive flea and tick product lines. Business did begin to recover near the end of the period, suggesting momentum heading into the new quarter. PetMed Express did say that its strategic partnership with telemedicine Vetster is already aiding results. The company’s customers can now have around-the-clock access to doctors that can provide virtual care and medications for pets.
Shareholders have seen their annual dividends grow for 13 consecutive years, though the company hasn’t raised its dividend since the February 2021 payment date. The projected payout ratio of 122% for 2022 is likely the reason behind this. Still, the dividend has a CAGR of 8% over the last 10 years, and shares yield a very generous 5.5%.
York Water Company (YORW)
The final small-cap name to consider is York Water Company (NASDAQ:YORW), a water utility company that operates in Pennsylvania. The company has a market capitalization of $611 million and annual revenue of $55 million.
York Water Company’s footprint in Pennsylvania is small, as the company has operations in just Adams, Franklin and York areas. The company covers just 54 municipalities in these areas and supplies water services to more than 75,000 residential, commercial and industrial customers. Just over 210,000 customers are in the company’s service area.
That said, York Water Company has been in business since 1816. It is the oldest publicly traded water utility company in the U.S. Despite its long history of business, the company continues to grow. The customer count has increased by more than 10,000 over the last year alone. That’s a significant increase given the size of the base. Some of this growth was organic, but the purchase of wastewater company West Manheim Township in early January and the addition of Letterkenny Industrial Development Authority in August of this year also contributed new customers to the base.
Aside from new customers, York Water Company uses increases to water and wastewater rates to grow its business. Typically, rate increases are capped at 5% per year, which leads to steady and consistent revenue growth. The company is able to secure such increases because of the investment it makes in its infrastructure, including a planned $176 million investment in its water and wastewater systems through February of 2024.
York Water Company grew revenue by 9% in the third quarter, its strongest year-over-year showing in more than five years. Growth was generated through acquisitions and higher water rates.
Despite its size, York Water Company has an impressive streak of paying a continuous dividend for more than 200 years. This is one of the longest dividend-payment streaks in the market. The company paid its 607th consecutive dividend at the end of September. The dividend has a CAGR of nearly 4% since 2012, and the company has increased its dividend for 25 years. Shares yield just 1.8%, but that yield is likely safe as the expected payout ratio for 2022 is 59%.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
