Why Warren Buffett Loves Small Cap Dividend Stocks

One of the big advantages of investing in small cap stocks is that they’re overlooked. That can create an opportunity for investors who are willing to consider smaller companies with bright prospects.
Most income investors like to own blue chip dividend stocks. After all, stocks including Altria (NYSE: MO) and McDonalds (NYSE: MCD) have a proven history of delivering dividends and an appreciating share price.
With many income investors overlooking small cap dividend stocks, this creates a big profit opportunity.
There is much to be said for investing in small cap stocks. But Berkshire Hathaway (NYSE: BRK-B) Chairman Warren Buffett best explained the advantage of these investments.
In an interview with Fortune magazine, “The Oracle of Omaha” described his investment in a small cap stock called See’s Candies. Buffett described this as the investment that taught him the most. Berkshire eventually bought See’s Candy in 1972 for $25 million.
In that Fortune article Buffett said, “”It’s one thing to own stock in a Coca-Cola or something, but when you’re actually in the business of making determinations about opening stores and pricing decisions, you learn from it. We have made a lot more money out of See’s than shows from the earnings of See’s, just by the fact that it’s educated me.”
Most institutional investors shy away from small caps. But for astute individuals, these off the radar stocks offer some of the most compelling opportunities. I’ve recently discovered three small cap stocks that Warren Buffett wishes he could buy today.
The stocks are Associated Estate Realty Corp. (NYSE: AEC), Glen Burnie Bancorp. (NASDAQ: GLBZ), and Artesian Resources Group (NASDAQ: ARTNA). Income investors will also love these stocks for their solid dividends.
It’s likely that you’ve never heard of these three stocks. Associated Estate Realty Corp. is a small cap real estate investment trust (REIT). Glen Burnie Bancorp is a local bank operating in Maryland. And Artesian Resources Group is a small water utility. All three deliver healthy profit margins and dividend yields that are at least 50% higher than the S&P 500.
Let’s dig into each of the three stocks.
Investing in an apartment REIT like Associated Estate Realty Corp. is an excellent way to profit from the evolving American “Share Economy.” In the wake of the last recession, many people continue to rent homes. With more demand for rentals, apartment REITs benefit from raising rates and high occupancy rates.
Based in Ohio, Associated Estate Realty owns and manages properties in the Midwest, Mid-Atlantic, and Southeast regions of the United States. It specializes in operating apartment communities. With a dividend yield of 3.4% and a profit margin of 94% percent, it obviously does this very well. Those marks easily top the mean for much bigger publicly traded companies on the Standard & Poor’s 500 Index (NYSE: SPY) as shown by the chart below.
Glen Burnie Bancorp is a small cap bank that is punching above its weight class as a dividend stock with a yield of 3.2%. By contrast, Bank of America (NYSE: BAC) – one of Warren Buffett holding – has a dividend yield of 1.3%. Its profit margin is nearly twice that for the Bank of America, too. Based in Anne Arundel County, Maryland, Glen Burnie Bancorp should also benefit from the November election of a pro-business governor for the state, and executive for the county.
Artesian Resources operates in the economically stable region of the Delmarva Peninsula, providing water and other services to nearly 80,000 customers in Delaware, Maryland, and Pennsylvania.
Utilities are known for high dividend yields, and Artesian Resources more than delivers with a 3.9% payout. The company is able to pay a healthy dividend, thanks to its 12.5% profit margin. That’s far superior to the average 7.9% margin of other utilities.

Dividend Yield Profit Margin
Associated Estate Realty Corp. 3.37% 93.70%
Glen Burnie Bancorp. 3.15% 14.10%
Artesian Resources Group 3.88% 12.50%
Standard & Poor’s 500 Index Average 1.98% 9.4%

Source: Finviz
Small cap dividend stocks including Associated Estate Realty, Glen Burnie Bancorp, and Artesian Resources Group are too small for many institutional investors. Often these funds have a mandate to invest in mid and large cap stocks, and that means they’re not allowed to buy small stocks.
This allows individual investors to own these stocks without worrying about what a large institutional owner might do next. Each is also a low beta stock, which studies have proven perform the best over time. If you’re looking for small cap dividend stocks, you may want to dig into each of these.

Collect Dividend Income Every Month! 

We’ve put together a simple calendar that pulls together all the market’s best dividends into a single, easy-to-read document. One look, and you’ll be able to set up a 12-month dividend stream for regular income every month. Click here to see the full details.

To top