Generally speaking, small-cap stocks have market capitalizations below $2 billion. They tend to have stronger growth potential over the long run when compared to bigger companies in their respective industries.

As a result, dividend growth investors looking for long-term income might want to take a closer look at small-cap stocks.

These three small-cap stocks have dividend yields above the market average, as well as long-term dividend growth potential.

Farmers & Merchants Bancorp (FMCB)

Farmers & Merchants Bancorp (NASDAQ: FMCB) is a locally owned and operated community bank with 32 locations in California. Due to its small market cap of approximately $700 million and its low liquidity, it passes under the radar of most investors. Nevertheless, F&M Bank, as it’s often called, has paid uninterrupted dividends for 89 consecutive years.

The company is conservatively managed and, until eight years ago, had not made an acquisition since 1985. However, in the last eight years, it has begun to pursue growth more aggressively. It acquired Delta National Bancorp in 2016 and increased its locations by four. In late 2018, it acquired Bank of Rio Vista, which has helped F&M Bank to further expand in the San Francisco East Bay area.

Second quarter financial results reported in mid-July showed the bank grew its adjusted earnings per share 5% over the prior year’s quarter, from $28.03 to $29.39. It posted 5% growth of loans and flat deposits. Net interest income dipped 3%. This was due to a contraction of net interest margin, from 4.28% to 3.91%, amid higher deposit costs. Management remains optimistic for the future, as the bank enjoys one of the widest net interest margins in its sector.

F&M Bank is a prudently managed bank and has always targeted a conservative capital ratio. The bank currently has a total capital ratio of 14.6%, which results in the highest regulatory classification of “well capitalized.”

Moreover, its credit quality remains exceptionally strong, as there are extremely few non-performing loans and leases in its portfolio. The conservative management results in lower leverage and thus slower growth than leveraged banks during boom times. At the same time, this approach protects the company from recessions, including the one resulting from the pandemic.

With the Fed raising interest rates since 2022 and the bank only recently pursuing growth more aggressively, we expect 5.0% annual EPS growth over the next five years. A contributor to growth will be the new branch in Oakland, which opened in the fourth quarter of 2021. FMCB has increased its dividend for 59 consecutive years, making it one of these small-cap stocks that’s also a dividend king.

Gorman-Rupp (GRC)

Gorman-Rupp (NYSE:GRC) began manufacturing pumps and pumping systems back in 1933. Since that time, it has grown into an industry leader with annual sales of nearly $700 million and a market capitalization of approximately $980 million.

Today, Gorman-Rupp is a focused, niche manufacturer of critical systems that many industrial clients rely upon for their own success. Gorman Rupp generates about one-third of its total revenue from outside of the U.S.

Second quarter earnings posted in July reported that revenue of $169.5 million declined about 1% year-over-year. The decline in sales was due to a decline in volume, partially offset by the impact of pricing increases taken in the first quarter.

Gross profit was $54 million, resulting in gross margin of 31.9% of revenue. These are improvements over $51.7 million and 30.2%, respectively, from the same quarter a year ago. The gross margin increase was due to a 280-basis point improvement in the cost of material, most of which was from higher selling prices. Adjusted EBITDA was $35 million, or 20.8% of sales, up from $33.7 million and 19.7%, respectively, a year ago.

As the company makes products for industrial and municipal clients, its revenue can swing from one year to another. Margins have been stable over the past decade. We are forecasting 7% earnings per share growth going forward. The company can achieve this result mostly through high single-digit sales growth. Given the company’s robust backlog of uncompleted work, we see revenue growth continuing for the near term.

The company also has one of the most impressive dividend increase streaks in the market, which currently stands at 51 years. That makes Gorman-Rupp another of our small-cap stocks that’s a member of the dividend kings. GRC stock currently yields 1.9%.

Atrion Corporation (ATRI)

Atrion Corporation (NASDAQ: ATRI) develops and manufactures products for medical applications. The company’s medical products are used in several fields, including cardiovascular, fluid delivery and ophthalmic applications. The company’s fluid delivery products contribute to a significant portion of the company’s revenue and nearly half of net revenues.

Cardiovascular products such as its Myocardial Protection System (MPS) form just over one-third of annual sales. The remainder is composed of ophthalmic products including medical devices that disinfect contact lenses.

In early August, the company reported second-quarter results. Revenue of $48.8 million increased 11% from the same quarter last year. MPS console sales rose 22% and MPS disposables sales were up 21% year-over-year.

With production of MPS consoles at record levels and new partnerships underway, Atrion anticipates improved operating income in the back half of the year.

Atrion remained debt-free as of the end of the second quarter, with cash and investments amounting to $23 million on the balance sheet. ATRI has a strong balance sheet which boosts its dividend growth prospects.

Solid cash generation is reflected in the company’s dividend growth over the years. Its five-year average payout ratio stands at 30.4%, and the company has increased dividends at a compound annual growth rate of 48.6% during this time. ATRI has consistently increased its dividend payment to shareholders for 21 years and currently yields 1.9%.

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.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.