3 Little-Known Dividend Stocks to Buy for Growth and Income
Unlike many dividend stocks, these three picks have the potential to hand investors share price gains and big dividend checks. Find out what makes these under-the-radar growth stocks smart additions to your portfolio.
In general, the best opportunities for dividend income-focused investors can be found in the mid-cap sector of the stock market. In many cases, large cap companies are too well analyzed, making it tough to find above average investment opportunities. Small cap stocks are riskier and sometimes without the increased reward for taking that higher risk. However, I do occasionally come across small cap income stocks that deserve a deeper look.
Market capitalization, or market cap, is the value of a company measured by its share price times the number of shares outstanding. You don’t need to dig up the share count numbers and do the math. Every financial website includes market cap when you look up a share price. The general threshold for large-cap is a market value above $10 billion. The popular stocks that most people know and that you see widely covered in the financial news have values measured in tens and hundreds of billions of dollars. For example, popular dividend stock AT&T Inc. (NYSE:T) has a market cap of about $260 billion. These large companies are the ones owned by big mutual funds, pension funds, and big money managers. There are about 200 publicly traded, large-cap U.S. companies
The generally accepted range for mid-cap companies is market values from $1 billion to $10 billion. These are companies that have grown big enough to prove they can grow but have a lot of upside on their way to large-cap status. I like mid-caps because they are often not very well followed or analyzed by Wall Street analysts, fund managers, and the general investing public. My stock research focuses on mid-cap companies, where I often find stocks that have not been fairly valued by the market. An undervalued share price means a higher dividend yield in relation to the companies cash flow safety and dividend growth potential. Historically, mid-cap stocks as a group have outperformed both large-cap and small-cap stocks. There are about 900 to 1,000 stocks in the mid-cap space.
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There are 3,000 to 5,000 small cap stocks with market values of less than $1 billion all the way down to a few million dollars. Often, market values of less than $100 million are referred to as micro-cap. Small companies often just do not have the resources –financial, physical, or intellectual – to compete with larger companies and grow. Also, it is hard to find the potential winners out of such a large number of companies. The Wall Street analyst crowd spends little or no time putting out reports on small companies, so the individual investor has few resources that can help thin down the large small cap list to a smaller number for more detailed research. (INSERT SCG PLUG) Finally, a small cap company may be so because it is very new to the publicly traded market. This type of company has no track record that we can look at and make some better predictions about the future.
Although I focus on mid-cap stocks, I do run across others of interest that might fit into my investment criteria in both large and small-cap sizes. Here are three very small cap stocks that could put some zip in an income-focused investors portfolio.
Horizon Technology Finance Corp (NASDAQ:HRZN) is a $150 million market cap business development company (BDC). The company provides secured loans to venture capital-backed and private equity backed growth-stage companies. The targeted industries for investment are technology, life science, healthcare information services, and cleantech. Horizon Technology receives equity warrants from its client companies that can pay off when the client companies go public. The risk is that you have a small cap lender making loans to much smaller potential high-growth companies. HRZN has paid a steady monthly dividend and currently yields 10.7%.
Jernigan Capital Inc (NYSE:JCAP) is a $90 million real estate investment trust (REIT) that provides financing for the development of self-storage facilities. Over the last few years, self-storage has been one of the hottest commercial and equity REIT sectors. Jernigan Capital came to market with a March 2015 IPO. The company is not yet earning its big dividend. This is a stock that has the potential to make investors a lot of money, however, it also has the potential to completely fail within the next few years. JCAP currently yields 10%.
Sotherly Hotels Inc (NASDAQ:SOHO) is a $90 million market value hotel/lodging REIT. SOHO has very high dividend coverage, with cash flow that is three times the current dividend rate. There is room to significantly increase the quarterly payout. However, the REIT has a debt/EBITDA ratio that is at least double the average for lodging REITs. Revenue in the hotel business can be very cyclical, so the high amount of debt could result in much less dividend coverage in an economic downturn. The stock yields 6.2%.
While stocks like the three profiled above might have great future potential, hunting down stable companies that regularly increase their dividends is the strategy that I use most often to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and regular dividend growth is what has given me the most consistent gains out of any strategy that I have tried over my decades-long investing career.
And, there are currently over twenty of these stocks to choose from in my Monthly Paycheck Dividend Calendar, an income system used by thousands of dividend investors enjoying a steady stream of cash.