Small-Cap Dividend Stocks: Exciting Opportunities for the Savvy Investor
When the average investor considers dividend stocks, they often focus on established large-cap blue-chip corporations. Nevertheless, small-cap dividend stocks—particularly those in Canada and the U.S.—offer an intriguing (and often neglected) avenue for income generation and capital appreciation.
In this article, we will examine the reasons these lesser-known stocks should be on your radar, how to evaluate their potential, and the factors investors should be cautious about.
The Importance of Small-Cap Dividend Stocks
Small-cap firms—usually valued under $2–3 billion—often fly under the radar of Wall Street analysts and major financial institutions. However, for those willing to dig a little deeper, this is advantageous.
These stocks are more susceptible to mispricing, allowing retail investors to make purchases before wider market acknowledgment. And when a small-cap stock excels, the potential for significant gains can be remarkable.
Did You Know? It’s simpler to double the value of a $500 million company compared to a $500 billion one.
What distinguishes small-cap dividend stocks is their financial prudence. Companies in this sector that distribute dividends are generally more stable, exhibiting solid cash flow, manageable debt, and strong footholds in specialized markets. This mixture renders them appealing for investors pursuing both growth and income.
It’s essential to remember: Although small-cap indexes have lagged behind colossal tech firms in recent years, small caps frequently excel during broad market uptrends. History may be taking a new turn, but these firms still hold substantial potential as market dynamics evolve.
The Balance: Increased Risks, Increased Rewards
Small-cap stocks typically exhibit greater volatility than larger counterparts—a reality well understood by Canadian investors. Over the last decade, the iShares S&P/TSX SmallCap Index ETF (XCS.TO) has underperformed due to significant exposure to the energy and materials sectors.
In the United States, small caps within the iShares Core S&P Small-Cap ETF (IJR) have produced returns more aligned with the overall S&P 500, albeit with greater price fluctuations.
Key takeaway: Passive investing won’t suffice here. Diligent and informed stock selection is crucial for achieving success with small caps.
How to Identify Quality Small-Cap Dividend Stocks
At Dividend Stocks Rock (DSR), one reliable approach to pinpoint strong dividend opportunities is the Dividend Triangle—three essential metrics that, when trending positively over five years, signify a robust business:
– Revenue growth
– Earnings-per-share (EPS) growth
– Dividend growth
When all three metrics are strong, it indicates the company has a sustainable framework with the potential to enhance both its business and its dividend.
Obtain the Complete List: 300 Stocks with a Favorable Dividend Triangle
Looking for a quick route to discovering these quality stocks? The Dividend Rock Stars list comprises approximately 300 companies that demonstrate strong 5-year trends in revenue, EPS, and dividend distributions. This list is updated monthly and serves as an excellent launchpad for uncovering dividend treasures.
Notable U.S. Small-Cap Dividend Stocks to Monitor
1. Acme United (ACU)
– Market Cap: $156M
Acme United specializes in first-aid kits, cutting tools, and medical supplies. Its growth strategy is driven by smart acquisitions, integrating smaller brands across various markets. The company boasts a dividend track record exceeding 15 years and maintains low debt levels.
👍 Strengths: Growth from acquisitions, high product reusability
👎 Risks: Competes fiercely with major industry players like 3M and Honeywell
2. LeMaitre Vascular (LMAT)
– Market Cap: $2.29B
LeMaitre focuses on vascular medical devices, with 85% of its revenues coming from recurring sales. The company reliably grows its dividends, upholds strong financial health, and has expanded globally through acquisitions.
👍 Strengths: Recurring revenue, international reach, diverse product portfolio
👎 Risks: High P/E trading levels, regulatory risks could impact margins
3. OTC Markets Group (OTCM)
– Market Cap: $646M
OTCM operates trading platforms for securities not listed on major U.S. exchanges. It maintains a solid niche, enjoys high margins, and a growing dividend, benefiting from recurring issuer fees and platform scalability.
👍 Strengths: Monopoly-like niche, robust cash flow, significant insider ownership
👎 Risks: Regulatory changes, performance tied to trading volume
4. York Water Company (YORW)
– Market Cap: $548M
Established in 1816, York Water holds the title of the oldest investor-owned utility in the U.S. It provides regulated water and wastewater services in Pennsylvania. The dividend has been on the rise for over 28 years.
👍 Strengths: Exceptional stability, revenue that withstands recessions
👎 Risks: Limited growth potential, influenced by regulatory rate caps
Prominent Canadian Small-Cap Dividend Selections
1. Exchange Income Fund (EIF.TO)