One of the most attractive attributes of small-cap, dividend-paying stocks is their potential to outperform both mid- and large-cap dividend stocks.

In fact these little guys tend to be among the best performing stocks in the market, especially when you add dividend growth into the equation.

Ned Davis Research has compiled 40 years of data showing that dividend-growth stocks trounce other stock types, regardless of the size of the company. By far, small-cap, dividend-growth stocks are the best performers.

The following chart shows exactly what I mean – average annual returns for small-cap dividend growth stocks are around 20%. You can’t beat that with large or mid caps.

With this performance in mind, dividend investors may be well served to look at the small end of the market for their next income investment. The added benefit of capital gains potential – above and beyond steady income – could mean more than double the total return of your typical large-cap dividend stock … at least if you look at the last 40 years as prelude to the future.

One Dividend-Paying Stock You Should Consider

One stock to consider is quite possibly America’s smallest small-business lender, MicroFinancial (NASDAQ: MFI).

MicroFinancial is a small financial company that has tremendous potential for capital gains, as well as a stable dividend policy that has been in effect since 2005. At today’s price of around $7.20, the stock yields a very respectable 3.4%.

MicroFinancial does exactly what its name implies – it provides micro-ticket financing to its customers, which typically include both start-up and established businesses. Headquartered in Burlington, MA, MFI has been in business since 1987.

I like MicroFinancial for a number of reasons, but primarily because it is a very small company with significant growth potential and a record of stable dividends and profitability. It serves a sector of the market (small businesses) that provides the vast majority of services and products consumed in the United States.

This company is the logical byproduct of a corporatized banking system that no longer serves the majority of Americans. Without big banks acting as lenders and stewards of those loans, a company like MFI can pick up the slack.

MFI’s business model is hardly complicated – so long as the company leaves an appropriate cushion for loans that go bad. It has been successful thus far, writing more than 750,000 contracts throughout the entire country during its 25 years in business.

Micro-ticket financing is increasingly being utilized by small and start-up businesses to acquire equipment on lease. Reports indicate that up to 80% of US businesses lease their equipment. And with small businesses as the true backbone of the U.S. economy, MicroFinancial has a tremendous market opportunity that it estimates at $6 billion in its focus markets.

As you might expect of clients who use this type of specialized financing, the equipment financed is not overly sophisticated. They tend to buy things like water coolers, security equipment, restaurant equipment, point-of-sale authorization equipment and that sort of thing.

Not complicated – but absolutely necessary. That’s a good market to serve.

MFI has consistently paid dividends since 2005 and in late 2011 raised its quarterly dividend by 20%, to $0.06. And it currently trades at a very reasonable PE of around 11.6.

With MicroFinancial, investors can purchase one of the few simple-to-understand and steady dividend-paying, small-cap financial companies in the market. It’s worth a look if you’re seeking a high-quality dividend-paying stock with capital gains potential.

Good Investing,

Tyler Laundon, MBA

Published by Wyatt Investment Research at