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The Small-Cap Screen That Beats the Market

NEW YORK (TheStreet) -- Last Friday, I reviewed the performance of my annual list of small-cap dividend growers, which for the third consecutive year outperformed the S&P 500. More importantly, they outperformed the S&P 600 Small-Cap Index and Russell 2000 Index, which are both more appropriate benchmarks. While three years of outperformance does not necessarily mean that this technique will always be successful, it is worth repeating at the very least.

The theory behind this screen is quite simple. Assemble a group of smaller companies that have been increasing their dividends and appear to be able to continue doing so. I have long been a believer that dividends may be a better indicator of a company's health and prospects than earnings alone. I think this primarily because dividends cannot be manipulated as earnings can. Furthermore, a management team that is increasing the dividend is displaying confidence about the future, another potential positive.

For this strategy, all selected stocks must have:

  • Market Caps between $500 million and $2 billion,
  • Regular dividend increases in each of the past five years (special dividends are not included),
  • Long term debt to equity ratios below 50%, and
  • Dividend payout ratios below 50% for the trailing 12 months and last two fiscal years.

Last year, 27 companies made the list; this year there are just 17. That is not surprising given the great run in the markets over the past year. The rising tide no doubt lifted several potential candidates above the $2 billion market cap limit. (Perhaps I'll embark on a search for mid-cap dividend growers in the future).

There are several familiar names that also made the cut last year. These include International Speedway Corp (ISCA), J&J Snack Foods (JJSF), Raven Industries (RAVN), Stepan (SCL), Lindsay (LNN), Gorman Rupp (GRC), BancFirst (BANF), and Badger Meter (BMI).

JJSF ChartJJSF data by YCharts

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