Small Cap Income Plays for Flat Markets
First and foremost, I want to congratulate Landon Donovan and the whole U.S. soccer team. While the U.S. vs. Algeria game was a bit more stressful than I would have liked, the forward's winning stoppage-time goal more than made up for my temporary discomfort. I just hope my blood pressure can handle the Ghana game on Saturday!
***In Small Cap Investor Daily, I spill a lot of ink talking about growth stocks. You're probably reading this daily in hopes of finding the next True Religion (NASDAQ: TRLG), a small-cap company that saw its stock price rise over 2000% after I recommended it. These outsized gains are what got me into the small-cap game initially, but I also like to keep an eye out for dividend paying small-caps. All investors should have exposure to income stocks, and the small-cap asset class is one that many overlook at their own peril.
Right now, we're seeing a lot of stocks moving horizontally. In fact, I expect the major averages to mostly trade sideways over the summer months. Gaining this week and dropping back down the next. Investors are trying to determine whether this market is a bear or a bull, or some weird hybrid capable of devouring us all. In this kind of uncertain market I suggest taking a look at dividend paying small-caps.
My career in the stock market started with a gift of Exxon stock from my grandparents and a dividend reinvestment plan. I know firsthand the value of compounding interest. If you start early enough, your money can just grow and grow. For those of you 10, 20, or 30 years from retirement, I can't stress compounding interest enough. A few companies with sweet dividends can be the safest and most profitable plays in your portfolio.
The idea that large-cap stocks are the only ones providing safe, steady income is simply false. Sure, The Coca-Cola Company (NYSE: KO), McDonald's (NYSE: MCD), and Proctor & Gamble (NYSE: PG) are perennial favorites for income investors, but there is serious dividend paying treasure hidden in the small-cap asset class. Here are a few small caps with eye popping dividend yields:
American Software Inc. (NASDAQ: AMSWA)
American Software Inc. is a pretty small small-cap. The Atlanta based company develops, sells, and services software for supply chain management. It has a market cap of $132 million, and an attractive dividend yield of 6.60%. That's up from 3.3% in 2007.
American Software has done well recently. Firms are cutting costs, and American Software's supply chain management suite helps companies to be more efficient - thus boosting their bottom lines.
The company released fourth quarter earnings after market yesterday and reported a fourth quarter profit 14% higher than last year. For the full year ended in April, net income for the software maker increased to 22 cents a share, compared with 12 cents a share last year.
Shares have recently pulled back to major support around $5.15, hence the large dividend right now. With a forward PE of 15.2 and a PEG ratio of 1.06, shares appear to be relatively fairly valued - but we're not looking at this one for pure stock price performance.
With nearly $54 million in cash and zero debt the company seems in good shape to continue paying its dividend indefinitely. Plus, it has 37 consecutive quarters of profitability pointing toward solid financial management. Put American Software on your radar, I think shares could pull back a bit more before turning up so no need to jump right now.
Navios Maritime Holdings (NYSE: NM)
This Greek shipping firm (Don't run screaming just because they're Greek) is expected to deliver 13% sales growth next year. Navios has a lot of exposure to emerging markets, supporting its increase in sales. The stock price has steadily rebounded after the global economic downturn, and the company is trading at $5.44, just about the center of its 52 week range.
Navios ships drybulk commodities, like iron ore, coal, grain and fertilizer, so as prices for commodities continue to rise, shipping these items becomes more and more attractive. That will seriously help the firm's top line. Financial Times polled analysts have a median 12 month price target of $8.00 for the company, a 50% premium over current prices.
And now the best part-Navios has a 4.30% dividend yield! That's solid income from a company that has also been able to maintain profitability going back at least as far as 2007.
This stock has also recently pulled back, and is in a downward channel right now. The stock is looking for support at current levels, if it breaks lower look to $4.50 as the next support level. As with most shipping stocks, Navios has a ton of debt so be sure you realize that the dividend payment is levered, and can be at risk. But shipping stocks as a group make huge gains when economic activity increases, so if you can stomach the volatility then the group is worth a look.
Deluxe Corporation (NYSE: DLX)
Deluxe is a Minnesota check printing and business-services firm. The firm, with a market cap of $1 billion, is also known for giving fat checks to their shareholders. This company has an impressive 4.80% dividend yield.
Deluxe is benefiting from a wave of new entrepreneurs and start-up companies. Big companies have not yet ramped up their hiring, so many laid off workers are starting their own businesses, or joining small start-ups. These fledgling companies are tiny, and only able to focus on their core businesses. There is high demand for external support systems for small businesses.
The growth in start-ups propelled Deluxe to a terrific first quarter, with earnings of $33.4 million, or $0.65 per share. That was up from $12.5 million in the same period last year. Don't expect big revenue growth with Deluxe, mid-single digit percentage growth is more likely. It's also in a painfully boring industry, but there's nothing boring about that 4.8 percent yield.
***Most investors don't look to the small cap asset class for income stocks - but that's a mistake. The potential for outsized stock price gains and nice quarterly checks is there so I recommend adding at least a handful of these types of companies to your portfolio. The three stocks above are a starting point worth your consideration.
If you've got a shorter time-frame to see upside, I urge you to check out my new report on the Russell Reconstitution. I selected three terrific growth companies that should make it into the final draft of the new Russell this Friday. Last year, stocks included in the new Russell saw a one day 8% bounce.
The report will be out soon, so keep an eye on your mailbox for directions on how you can get yours.
