This is a guest contribution by Bob Ciura of Sure Dividend.
Investors have not traditionally associated small-cap stocks with dividends, and for good reason. Many small-caps, generally defined as stocks with market capitalizations of $250 million to $2 billion, do not pay dividends. This is because small companies usually need to retain as much cash flow as possible, to invest in growth.
Because of this, small-caps that pay dividends can be hard to find. It is even harder to find dividend-paying small-caps with high dividend yields. But investors can locate high-yielding small-cap stocks by running a screen of the Russell 2000 Index, the world’s best-known benchmark of small-cap stocks.
These 3 small-caps generate steady profits, and return a significant portion of their profits each year to investors through high dividend yields.
High-Yield Small-Cap #1: Tanger Factory Outlet Centers (SKT)
Tanger Factory Outlet Centers is one of the largest owners and operators of outlet centers in the United States and Canada. It operates and owns, or has a stake in, a portfolio of 40 upscale outlet shopping centers, across 20 states and Canada. The company leases over 2,900 stores that are operated by over 500 different tenants that are frequented by more than 180 million shoppers every year. Tanger has a market capitalization of $1.5 billion.
The company reported its most recent quarterly results on July 31. Adjusted funds from operations (FFO) of $0.57 per share declined 5% compared with $0.60 per share in the same quarter last year. However, Tanger grew its occupancy by 60 basis points from the previous quarter, to 96%. Another positive note was that traffic increased 2.3% for the quarter.
Tanger expects its occupancy to decline somewhat in 2019, to a range of 94.0% to 94.5%, due to anticipated store closures by certain tenants. The company has maintained an occupancy rate of 95%+ for 25 consecutive years. While occupancy may come in below its historical average this year, Tanger still has a strong occupancy level overall.
And, the company generates enough cash flow to reward investors with a generous dividend. As a Real Estate Investment Trust, Tanger distributes the vast majority of its FFO to shareholders. The company has an expected FFO payout ratio of 63% for 2019, which indicates the payout is secure. With a yield over 9%, Tanger is an attractive REIT for income investors.
High-Yield Small-Cap #2: Greif, Inc. (GEF)
Greif is a global leader in industrial packaging products and services. The company produces steel, plastic and fibre drums, bulk containers, reconditioned containers, flexible products, containerboard, as well as packaging accessories. Greif has a market capitalization of $1.8 billion and the company operates in over 40 countries.
On August 28, Greif reported third-quarter fiscal year 2019 results. For the quarter, sequential revenue increased 24% due to the $1.8 billion acquisition of Caraustar, a leading manufacturer of high-quality recycled materials and paper products.
Adjusted earnings-per-share rose 5% year over year, to $1.26 for the third fiscal quarter. Greif also provided an updated fiscal year 2019 outlook. The company continues to anticipate adjusted earnings-per-share of $3.70 to $4.00 and adjusted free cash flow of $230 million to $250 million.
Greif will benefit from continued global economic growth. As an industrial packaging company, Greif’s profits are cyclical along with the global economy. Therefore, Greif has a positive long-term growth trajectory. Near-term risks exist, such as the U.S.-China trade war and potential for a global economic slowdown, but the long-term thesis remains intact.
Since Greif is a highly profitable company, it can afford to return cash to shareholders. Greif currently pays a quarterly dividend of $0.44 per share, which works out to $1.76 per share on an annual basis. The current dividend yield is a highly attractive 4.6%. With an expected dividend payout ratio of 46% for 2019, Greif’s dividend is sustainable with room for future increases.
High-Yield Small-Cap #3: Dine Brands Global (DIN)
Dine Brands is a casual and family dining restaurant chain, that operates under the company-owned and franchise model. It owns the Applebee’s and IHOP brands. Dine Brands has a market cap of $1.3 billion. Dine Brands has engineered a remarkable turnaround since 2017, when the company suffered falling sales amid tougher competition.
By focusing on provide value to customers and closing its poorest-performing locations, Dine Brands has reignited growth. For example, in the most recent quarter, revenue totaled $228 million, up 24% from the same quarter last year. Revenue growth was the result of higher royalties and franchise fees, as well as sharply higher advertising revenues. In addition, comparable sales—which measures performance at locations open at least one year—grew 2% for IHOP.
Earnings-per-share rose to $1.71, representing 66% growth versus the previous year’s quarter. The company forecasts earnings-per-share in a range of $6.80 to $7.05 for the full year, which means 2019 will be a highly profitable year for Dine Brands.
Dine Brands will continue to benefit from positive industry trends. Thanks to strong U.S. consumer spending and low economic growth, restaurant spending was up 4% year-to-date through August, according to the U.S. Census Bureau.
Dine Brands returns a significant portion of its cash flow to investors as a dividend. The company cut its dividend by 35% in 2018, as it required additional funds for its turnaround. But now that those efforts have materialized, Dine Brands resumed its dividend growth with a 9.5% increase in 2019. Future dividend increases are likely, as Dine Brands has a 2019 dividend payout ratio of ~40% and the company is growing earnings at a high rate.
Final Thoughts
With interest rates falling once again, income investors are in a more difficult position. The S&P 500 Index yields, on average, just 2% right now. In an environment of declining interest rates, high levels of investment income are harder to find.
Dividend stocks can help investors generate income, even when rates are on the decline. These three dividend stocks provide yields that are meaningfully above the broader market average. And, they offer investors a bonus in the form of high growth potential.
Sure Dividend helps self-directed investors and investment professionals find high-quality dividend growth stocks for the long run. We specialize in long-term investing for rising passive income over time. Sure Dividend was founded in 2014 and is trusted by more than 100,000 investors who receive Sure Dividend’s free dividend information.
To learn more, visit suredividend.com.
