In seeking stocks that pay out decent dividends, most investors tend not to think beyond the blue chips.
That's a mistake. While many household-name stocks have cut their dividends in recent months and may well cut them further, many solid and dependable dividend stocks can be found among lists of small-cap and midcap names.
These smaller stocks often generate stronger growth in their dividend payments over time.
Lots of prospects
To come up with names that won't let investors down, Barrons.com identified 118 companies with market values between $800 million and $3 billion that have increased dividends for five consecutive years. To be considered, a stock had to pay a current dividend yield of at least 2.5%.We eliminated companies that were not profitable or not expected to generate profit growth. Financial companies were struck from the list. We also nixed companies with a debt-to-capital ratio over 60% and any companies paying out more than 60% of their annual earnings in dividends.
Companies with high payout ratios have a harder time protecting their dividends in earnings downturns.
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Our selection criteria ended up weeding out several classic high-yield types of stocks, including real-estate investment trusts, master limited partnerships and many utility companies.
Among the stocks left standing were Universal (UVV, news, msgs), Owens & Minor (OMI, news, msgs), Flowers Foods (FLO, news, msgs), South Jersey Industries (SJI, news, msgs) and ABM Industries (ABM, news, msgs).
None of these stocks is a household name. In fact, only two sell-side analysts cover ABM, which provides cleaning services for industrial and commercial properties.
But all are well-established companies. In fact, the youngest, bread maker Flowers Foods, was founded in 1919.
Solid dividends harder to find
"It is getting hard to find stable, growing dividends, so you have to do a lot of hunting," says Howard Silverblatt, the senior index analyst at Standard & Poor's, referring to the rash of dividend cuts by big companies. "These days, small caps are an acceptable way to go."That notion flies in the face of some long-held biases on Wall Street. Investors typically like small-cap stocks for fast-climbing profits and highflying stock prices, not dividend income.
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Small companies, big dividendsSmall-cap stocks represent an overlooked opportunity for income-hungry investors, says Johanna Bennett of Barron's.
Unlike goliaths in the Standard & Poor's 500 Index ($INX) -- 72% of its stocks pay a dividend -- small companies often reinvest earnings to fuel future growth, rather than reward shareholders.
Still, dividend-paying stocks account for 56% of the S&P Midcap 400 Index ($MID.X) and one-third of the Russell 2000 Index ($RUT.X), including tobacco merchant Universal.
With a yield of 4.8%, Universal is the smallest company on our list. But it has the longest track record of dividend increases, having raised its payout every year since 1971.
"People believe there is a scarcity of small companies paying dividends," says Paul Magnuson, a co-manager of the Allianz NFJ Small Cap Value Fund (PCVAX). "It's one of the best-kept secrets in the small-cap arena."
Continued: What makes a safe dividend?
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