3 Top Small-Cap Dividend Stocks

Small-cap stocks that pay big dividends are rare.

• Many small businesses don’t generate much cash flow.

• Even those that are profitable and cash-flow positive often prefer to reinvest internally.

• As a result, only a few small-caps have high dividend yields.

Income investors have a hard time finding small companies that are willing and able to pay dividends.

Small companies can make great David-and-Goliath stories. Image: Peter Paul Rubens via Wikimedia Commons.

But small-cap dividend stocks can be a great play.

• By paying a dividend, a small company has already proven itself to be superior to many of its peers.

• Establishing a habit of treating shareholders well bodes well for the long-term future for investors.

• Dividends signal greater capacity for strategic thought from management.

Picking the right small-cap stock involves making a long-term bet on winners in an industry.

Source: Wikimedia Commons.

Idea #1: Olin Corp. (OLN)

Source: Olin.

Olin makes a variety of chemicals, including bleach products and various chlor-alkali compounds. The company also has a chemical-distribution business to move these products to market. Olin also owns Winchester, which makes ammunition both for military and sporting purposes.

Should You Add Olin to Your Portfolio?

Reasons to Own Olin: • Long history of continuous, stable dividends.• Current dividend yield of 2.8%.• Sustained demand for chemicals and favorable outlook for the

Winchester business.• Merger with Dow Chemical chlorine unit should bring growth.Challenges for Olin:• Recent weakness in sales and earnings.• Integration with Dow unit could take longer than expected.

Idea #2: Rent-A-Center (RCII)

Source: Rent-A-Center.

The rent-to-own retailer gives customers the ability to buy products after renting them, making high-priced goods available to customers without credit.

Should You Add Rent-A-Center to Your Portfolio?

Reasons to Own Rent-A-Center: • Dividend yield of 3.6%.• Exposure to lower end of retail market makes it resistant to a

weaker economy in the future.• 50% dividend growth in the past three years.Challenges for Rent-A-Center:• Strong economy is supporting growth, but vulnerability to

future economic downturns involves risk.• Negative credit outlook from bond-rating agency makes it

essential to keep working on debt reduction.

Idea #3: California Water Service Group (CWT)

Source: California Water Service Group.

The water utility serves 2 million customers in California, New Mexico, Washington, and Hawaii with water and wastewater services.

Should You Add CalWater Group to Your Portfolio?

Reasons to Own California Water Service Group: • 3.2% dividend yield with slow upward share-price trend.• 48 straight years of annual dividend increases.• Rising demand for water in California and other state markets

should support long-term growth.Challenges for California Water Service Group:• Severe drought has brought mandatory water-use restrictions

that are reducing demand and leading to lower revenue.• Regulated business requires cooperation from regulators to

ensure rates rise to cover higher costs over time.

Small-caps give dividends plus growth potential.

• Sales and earnings growth can boost share prices and support future dividend increases.

• Strengthening competitive advantages can produce stand-out returns.

• Collect dividends while you wait!

The best thing about small-cap dividend stocks is that they still have a promising future.

Image: 401kcalculator.org via Flickr.

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