Daily Gains Letter

Three Smaller Firms with Reliable Dividends

By for Daily Gains Letter |


Just because the S&P 500 and Dow Jones Industrial Average are in record territory, that doesn’t mean the overall stock market is worth looking at. At the same time, it would be a mistake for investors to consider reducing their positions in equities in favor of cash or bonds, Treasuries, and certificates of deposit (CDs).

Banks provide interest rates barely above zero percent; bonds are near three percent, and jumbo five-year CDs yield returns of just 1.5%. In a nutshell, investors looking to buy bonds are basically saying they are happy locking their hard-earned dollar into negative inflation-adjusted returns. They’re okay using an investment vehicle that loses money.

In light of the ill-begotten euphoria on Wall Street, investors looking to increase their retirement fund nest egg just need to be more discerning when looking at stocks. It would be a mistake to think that big stocks are the only place to make solid profits. At the same time, it’s important to remember that investors cannot earn income without taking some risk.

Right now, there is an increasing number of fundamentally and technically strong smaller companies offering regular, high dividend payouts that trump the paltry interest rates offered through other investing channels.

In the past, dividend-hungry investors had to turn to big banks and utilities. But now, regular payouts are being offered by smaller companies in less conventional sectors.

The joy with some smaller companies is that they tend to outperform their larger peers during an economic recovery. And because smaller companies can experience faster growth, patient investors get paid to wait for both capital gains and a dividend yield.

On the other hand, because smaller companies are more often than not less flush with cash than their larger-cap peers, it is possible they could cut the payouts if revenues and earnings slow.

To see what a dividend cut can do to a company’s share price, look no further than Just Energy Group Inc. (NYSE/JE; TSX/JE).

In December, Just Energy was trading above $9.00 per share and paid out $1.24 annually. In February, the company scaled back its annual payment to $0.84. After announcing the cut, Just Energy’s share price slipped from $9.62 to $8.05 per share overnight and is currently trading near $6.45 per share. Had you invested in Just Energy back in January simply because of the high dividend yield, you would have lost almost half of your investment.

That’s why it’s best not to focus on dividend yield if you’re diversifying your investment portfolio. Rather, consider the stock’s long-term prospects and if the dividend is sustainable.

TICC Capital Corp. (NASDAQ/TICC) is a business-development company based in Greenwich, Connecticut. The company has a market cap of $510 million and is currently trading near $9.80 per share. TICC’s share price is up 11.6% year-over-year and the company provides an annual dividend of 11.7% percent, paid quarterly.

Electro Rent Corporation (NASDAQ/ELRC) rents, leases, and resells electronic test and measurement equipment, computers, servers, and related equipment. The company has a market cap of $438 million and is trading near $18.15 per share. Its share price is up a little more than nine percent year-over-year and 21.5% year-to-date. Electro Rent provides an annual dividend of 4.3%, paid quarterly.

Twin Butte Energy Ltd. (TSX/TBE) is a low-risk oil producer with a market cap of $605 million. Currently trading near $2.45, the company provides an annual dividend of 7.5%, paid monthly.

Thanks to low interest rates, investors are looking to increase their income stream through various different channels. While stocks with high dividend yields are a great way to generate income, it’s important that investors understand what they’re investing in. With a little due diligence, investors can find lots of great small- to mid-cap companies with a history of providing dividends that are often overlooked.

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