There are several reasons for this. First, large-cap companies are better known and have more analysts following them. It stands to reason they are more efficiently priced than small-cap stocks with fewer (or none) analysts. Secondly, small-cap stocks simply have longer growth runways ahead. A company with a market cap of $500 million will simply have more room to grow than a company with a market cap of $50 billion. If it makes it to $1 billion, and you've invested, you double your money; if the large cap company adds $500 million to its market cap, you've only made 1%.
The trick with small-cap companies is knowing which ones will double and which will go bust -- as many of them do. Here are ten small-cap stocks with dividend yields of at least 3% -- some with signifncantly higher yields than that. These stocks have reasonable price-to-earnings ratios and market caps under $2 billion. These stocks are worth added attention when looking to improve your dividend portfolio.
1. Universal Corporation (UVV)
Universal Corporation is the world's leading leaf tobacco merchant and processor. The company was founded in 1918 and has increased its dividend payments for an amazing 44 consecutive years.
The company acts as an intermediary between tobacco farmers and large tobacco corporations that process tobacco into cigarettes, chewing tobacco, or other end use products. The tobacco industry as a whole has been under pressure due to rising taxes and an ever-growing awareness of the dangers of smoking. As a result, Universal Corporation has seen virtually no earnings-per-share growth over the last 15 years. At first glance, this would make Universal Corporation seem like a poor investment, but the tide appears to be turning.
Universal Corporation will soon begin supplying cigarette giant Philip Morris (PM) with tobacco. Previously, Philip Morris had purchased directly from farmers. Philip Morris expects to be able to reduce its tobacco spending by working with Universal Corporation. If the expected cost savings are realized, other large cigarette corporations could soon ink deals with Universal Corporation -- which would be very beneficial for shareholders.
The company currently has a dividend yield of 4.4%. The company's high yield gives investors current income while they wait for earnings to increase from the recent Philip Morris contract, as well as other potential future contracts. The company's stock has plenty room to rise with a price-to-earnings ratio under 15. Universal Corporation is a small cap value stock with a high yield and upside potential from potential new deals with large cigarette companies.
2. Cal-Maine Foods (CALM)
Cal-Maine Foods is the leading chicken egg producer in the United States. The company currently controls 23% market share of the U.S. egg industry. The company was founded in 1957 and has grown to generate $1.5 billion in sales per year. In 2014, Cal-Maine Foods sold more than 12 billion eggs. The company's operations are concentrated in the Southeast.
As the largest egg producer in the United States, Cal-Maine has an opportunity to further consolidate the egg industry. The company has completed 18 acquisitions since 1989 and is poised to continue purchasing smaller egg producers.
In addition to growth through acquisitions, Cal-Maine is benefiting from growing consumer demand for healthier products. Cage-Free and Organic egg sales are growing rapidly. The company owns the following specialty egg brands:
- Egg-Land's Best
- Land O' Lakes eggs
All four of these brands have grown volume by over 12% in the last year. In addition to rapid growth, specialty eggs command premium pricing. This premium pricing expands margins and makes specialty eggs somewhat resistant to the impact of chicken feed input costs.
Cal-Maine Foods is currently trading at a price-to-earnings ratio of just 13.2, despite its growth potential in specialty eggs. The market has not yet caught on to the non-commodity nature of the specialty egg market and is treating Cal-Maine Foods as strictly a commodity business. In addition to its low price-to-earnings ratio, the company has a dividend yield of 3.5%. Cal-Maine Foods appears mispriced and has significant upside. Investors will benefit as the company continues to consolidate the egg industry and realize profitable growth from growing demand for specialty eggs. If the market catches on to the premium pricing of specialty eggs, Cal-Maine's price-to-earnings ratio could jump significantly.
3. Douglas Dynamics (PLOW)
Douglas Dynamics manufactures and sells snow and ice control equipment for light trucks. The company generates 65% of sales with professional snow plowing companies. Municipal, other businesses, and personal sales combine to make up the other 35% of the company's sales. Douglas Dynamics controls 50% to 60% of its niche market, making it the largest player in its industry by a wide margin. The company's sales are strongest in the Northeastern United Sates. Douglas Dynamics has a market cap of $510 million and was founded in 1952.
The company's sales are heavily skewed toward Winter. As a result, it is attempting to grow sales and earnings by expanding into other truck equipment markets such as lift gates and wenches, as well as lawn and garden equipment.
In addition to expanding through new product offerings in different industries, Douglas Dynamics is slowly consolidating the snow plow industry. To this end the company acquired Henderson at the end of 2014. Henderson's primary line of business was customized snow and ice control solutions for heavy trucks, primarily in governmental agencies like the Department of Transportation.
Douglas Dynamics has a high dividend yield of 3.9%, which should appeal to income-oriented investors. In addition, the company has a price-to-earnings ratio of just 12.90. Douglas Dynamics' price-to-earnings ratio is low as the company benefited from a colder-than-average winter in 2014. Earnings-per-share are expected to fall somewhat in 2015; Douglas Dynamics has a forward price-to-earnings ratio of 19.1. The company appears to be trading around fair value at this time. Douglas Dynamics' 19.1 forward-price-to-earnings ratio reflects its dominance within its industry.
Douglas Dynamics has grown revenue-per-share at 11.7% a year over the last five years. The company should see both revenue and earnings continue growing at around 10% a year going forward -- adjusting for one-year swings due to warm/cool winters. The company's growth will come primarily from continued consolidation of the snow plow industry, where it has a competitive advantage.
4. PetMed Express (PETS)
PetMed Express sells prescription and over-the counter medicine for pets online. The company has a market cap of $346 million and was founded in 1996. PetMed Express has increased its dividend payments each year since 2009, when it started paying dividends.
PetMed Express is the industry leader in the $450 million online and mail-order pet medicine industry. The company controls about as much market share in the industry as all of its competitors combined, and generates about 60% of its revenue from over-the-counter medicine, with the balance coming from from prescription medicine. The company has struggled to grow earnings-per-share over the last six years due to tough competition from bricks-and-mortar and other online retailers, like Amazon (AMZN) .
Weak sales growth has led PetMed Express to focus on creating efficiency gains. The company was successful in this endeavor in 2014, as cost-of-goods-sold as a percentage of sales declined 50 basis points in the year. PetMed Express is rolling out more store-brand products to boost margins as well, which could prove beneficial for shareholders over the long run.
PetMed Express currently has a robust 4% dividend yield. Income-oriented investors with an eye toward safety should consider PetMed Express. The company has no debt and is currently carrying about $50 million in cash on its books -- very significant for a company with a market cap under $350 million. PetMed Express could use the cash it has accumulated to acquire smaller competitors and gain market share, or to repurchase close to 15% of shares outstanding. If management takes either action, the company's shares could rise significantly. With that said, the company currently trades at a price-to-earnings ratio of 20.1 which may be slightly on the high side given the company's mediocre historical growth record.
5. Guess Inc. (GES)
Guess designs and sells lifestyle apparel. The company was founded in 1981 and has a market cap of $1.56 billion. Near the end of 2010, Guess shares were trading around $40. Now, shares are trading for $18.26 -- more than 50% below highs of several years ago.
The company's share price drop is a result of a significant decline in same store sales, revenue, and earnings. Put simply, Guess' business has been in decline since 2010. The fashion industry is subject to whatever the latest trend happens to be. Guess has not been able to keep up with industry trends in the last half-decade. There are still bright spots, however.
First, Guess is still a highly profitable business. The company is using its cash flows to reduce its share count and pay dividends. Over the last four years, the company has repurchased an average of 2% of shares outstanding a year. The benefits of these share repurchases are magnified as the company is repurchasing shares when the stock price is low. Guess currently has a dividend yield of 4.9%. Shareholders can expect returns of nearly 7% a year from share repurchases and dividends alone from Guess. This excluded the potential for special dividends; in 2010 Guess paid shareholders a $2.00 special dividend, and a $1.20 special dividend in 2012. Strong share repurchases show management is very shareholder-friendly. It should be, as officers and directors own 28.6% of outstanding stock which aligns management and shareholder interests. Guess has virtually no debt on its balance sheet, but has $5.66 in cash per share.
Another bright spot for Guess is its rapid e-commerce growth. The company grew e-commerce sales 28% in 2014. As the company's e-commerce segment continues to grow, it will generate an increasingly important part of the company's revenues and earnings. Guess is cutting its store count by about 10% in the United States over the next year and a half. The store closures are a response to weak sales.
As of right now, Guess is a profitable retailer that has missed fashion trends. If the company can reestablish itself (and it has all the time in the world to do so), shares could easily rebound back to where they were years ago. In the meantime, investors will benefit from the company's near-5% dividend yield.
6. Rent-A-Center (RCII)
Rent-A-Center is one of the two leading rent-to-own retailers in the United States. The company offers consumer electronics, appliances, computers, furniture, and accessories for rent. Rent-A-Center is one of the few businesses that benefits from recessions. When consumers see credit scores decline and money tighten, they often turn to rent-to-own locations to finance purchases. Rent-A-Center grew earnings-per-share 21% from 2008 to 2009, while many other companies were struggling to remain profitable. Rent-A-Center currently has a market cap of $1.35 billion and was founded in 1986.
Rent-A-Center's operations consist of the following four segments:
- Core U.S. Stores: 77% of revenue
- Acceptance NOW Kiosks: 20% of revenue
- Mexico Stores: 2% of revenue
- Franchised Stores: 1% of revenue
Rent-A-Center's Core U.S. locations make up the bulk of its business. These stores have actually seen revenue decline slightly over the last five years. The improving economy has negatively impacted Rent-A-Center's core business as more consumers have money or credit to buy outright instead of renting-to-own.
Rent-A-Center's Acceptance NOW Kiosks are its bright spot. These kiosks are located in non rent-to-own retail stores. If a consumer is turned down for financing within the store, they go to the rent-to-own kiosk. Rent-A-Center buys the merchandise and creates a rent-to-own deal with the consumer. This greatly expands the company's reach and the Acceptance NOW Kiosk segment has grown to 20% of the company's revenue. The kiosks have an operating margin of 17.7%, significantly higher than the company's core store operating margin of 10.9%. In addition, the kiosk segment has grown revenue at 31.9% in fiscal 2014.
Shareholders in Rent-A-Center will benefit from the company's continued kiosk growth. Rent-A-Center's stock does not reflect this opportunity. The company is trading for a current price-to-earnings ratio of just 13.9. Additionally, the company has a 3.8% dividend yield. Rent-A-Center should appeal to value oriented investors who are also interested in generating current income from the company's solid dividend payments.
7. Nutrisystem (NTRI)
Nutrisystem provides weight management and fitness products and services in the United States. The company has a market cap of $570 million and was founded in 1972. Nutrisystem's plans focus on guided weight loss through the help of pre-made meals. A total of 10% of the company's customers are on plans tailored specifically for diabetes.
Demographics in the U.S. favor Nutrisystem. Two out of every three Americans are either overweight or obese, based on the body-mass-index. In total, there are over 160 million overweight adults in the United States. Around 85 million are trying to lose weight at any time. Nutrisystem's target market has grown over the last several decades, which creates opportunity for the company.
Nutrisystem currently has a 3.6% dividend yield and a forward price-to-earnings ratio of 20.8. The company is coming off a very strong 2014. Earnings-per-share grew 65% in 2014 thanks to price increases, better cost controls, and increased new distribution to Wal-Mart (WMT) and Sam's Club. The company should generate strong results in 2015 as well. Nutrisystem is rolling out an e-commerce store on Amazon and Walmart.com. The company will continue its cost containment plan as well. Management's guidance projects 18% earnings-per-share growth in fiscal 2015. Over the long-run, the company will not maintain such rapid growth. With that said, favorable demographics in the United States and increased exposure should continue to propel Nutrisystem's earnings higher.
In addition to solid growth prospects, Nutrisystem has a clean balance sheet. The company has no debt and about $30 million in cash on hand. This gives operating flexibility and available cash in case of unforeseen difficulties.
Nutrisystem is a growth business with a high dividend yield -- a rare combination. If the company's management increases its dividend payments in line with earnings-per-share growth, investors will see rapidly rising dividend payments. Nutrisystem should appeal to dividend growth investors looking for both current income and future growth potential.
8. Trustmark Corporation (TRMK)
Trustmark Corporation is a regional bank operating in the Southeastern United States with a market cap of $1.64 billion. The company was founded in 1889 and is headquartered in Jackson, Miss. In total, the company has 205 locations in Texas, Florida, Mississippi, Tennessee, and Alabama.
Trustmark Corporation stand out from larger banks thanks to its excellent customer service and friendly banking staff. The company has compounded its book value per share at 4.2%-a-year over the last decade. Trustmark Bank currently has a solid 3.8% dividend yield and a price-to-earnings ratio of just 13.1.
A total of 28% of Trustmark Corporation's deposits are non-interest bearing. Total cost of deposits for the company is just 0.14%. The lower the cost of deposits, the more money a bank makes on the spread between the cost of acquiring deposits and the interest earned on loaning out deposits to others. The company's net interest margin is currently 3.86%.
The catalyst for Trustmark Corporation shares to see solid gains is rising interest rates. The Federal Reserve is expected to increase interest rates in 2015. If that happens, shareholders of Trustmark Corporation will likely benefit because the company will be able to realize a larger spread on its net interest margin. This will cause earnings-per-share to rise.
Trustmark Corporation is a fairly conservative bank. The company managed to remain profitable throughout the Great Recession of 2007 to 2009 when other large banks were seeing extreme losses. Trustmark Corporation shares should be interesting to income-oriented investors as a way to hedge against rising interest rates.
9. SeaDrill Partners (SDLP)
SeaDrill Partners currently has a 17.6% dividend yield. This is among the highest on the market. The limited partnership's stock price has fallen about 50% on the year, which has driven up the dividend yield -- and created a potential buying opportunity.
SeaDrill Partners owns offshore drilling ships and units. Nine of the company's 10 primary rigs are under contract through at least the first quarter of 2017. Only one rig's contract expires in 2015. The company's contracts are primarily with the largest oil corporations in the world -- including ExxonMobil (XOM), BP (BP), and Chevron (CVX). Long-term contracts with the largest and most secure oil corporations in the world give SeaDrill Partners extremely stable cash flows, despite falling oil prices.
A mix of low oil prices and high debt have caused the significant decline in SeaDrill Partners stock price. The company currently has a 3.5-times EBITDA-to-debt coverage ratio, which is high. On the positive side, SeaDrill Partners has no long-term debt maturing until 2017 and has proven in the past it can roll-over its debt.
The combination of low oil prices and high debt means investors should not expect significant income growth from SeaDrill Partners over the next several years. With a dividend yield over 17%, no additional returns are needed for stellar performance. The company's long-term contracts with safe and stable oil corporations protects its cash flows. These shares have significant upside if oil prices recover by 2017. There is higher than average risk with the company, however. If oil prices remain low for an extended period of several years, the company will see its cash flows decline significantly as it negotiates contracts with lower rates than the company has now. Investors with a high risk tolerance should consider SeaDrill Partners as its upside potential outweighs the risks the partnership faces.
10. Safety Insurance Group (SAFT)
Safety Insurance Group is a property and casualty insurer with a market cap near $900 million. The company's primary line of business is personal and commercial automobile insurance. In addition, Safety Insurance Group offers home insurance and watercraft insurance. The company sells its policies through a network of independent agents in Massachusetts and New Hampshire.
Safety Insurance Group is true to its name. The company is extremely safe and conservative. Close to 90% of the company's float is invested in bonds which provide fixed income payments. Additionally, Safety Insurance Group plays it safe with its ultra-conservative balance sheet. The company has no debt at all.
The company's conservative nature served it well during the Great Recession of 2007 to 2009. Safety Insurance Group saw earnings dip just 20.2% at a time when insurance giants like AIG (AIG) imploded.
Safety Insurance Group's old school way of doing business has provided reasonable growth for shareholders. The company has compounded book value at 5.5% over the last eight years. Safety Insurance Group currently has an exceptional 4.7% dividend yield. The company's high dividend yield combined with its solid-if-unspectacular growth rate should give safety-oriented investors total returns of around 10% a year.
Safety Insurance Group currently trades at a price-to-book ratio of 1.26. The company's shares trade at a 26% premium to book value which reflects the safety of the stock compared to other riskier insurers. Safety Insurance Group appears to be trading around fair value based on its price-to-book ratio. Investors in the company stand to realize total returns of about 10% a year with very high safety. Income and safety oriented investors should consider shares of Safety Insurance Group as part of their diversified dividend growth portfolios.