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By Serkan Unal

In momentum investing, investors aim to capture gains by pursuing hot stocks that have an upward trending price. The opposite holds true as well, as momentum investors short stocks that have a declining trendline. This short-term strategy is based on the assumption that established trends in stock prices are more likely than not to persist in the future. However, this strategy embraces higher risk.

The Russell Small-Cap High Dividend Yield Index applies price momentum over the past 12 months as one of its selection criteria. Moreover, starting off with a universe of quality and financially-sound stocks, the Index includes stocks with relatively-high dividend yield, positive free cash flow, sustained profitability as measured by positive five-year return on equity, positive next-year earnings growth, and relatively low leverage. Here is a closer look at five small-cap stocks from the noted Index, with market capitalization of up to $1.7 billion, that pay dividend yields above 2.0% and exhibit the price momentum over the past three months. Even though the following five stocks are less-known as income investments, they represent good combinations of income and capital growth investment opportunities.

1. Steelcase Inc. (NYSE:SCS), an office furniture company, has a dividend yield of 2.6% and a payout ratio of 46% of the current-year EPS estimate. Its dividend was slashed in late 2008 and again in 2009, but since it has risen cumulatively by 125%. The company's long-term EPS CAGR is 11.0%, reversing the trend of negative growth, on average of about 10.0% annually over the past five years. Back in December 2012, Steelcase reported fiscal third-quarter revenue in-line with expectations and the EPS that beat consensus estimates by a penny. The strong performance was driven by a 3% organic revenue growth in the Americas, based on order growth of 7% year-over-year. The company forecasts adjusted fourth-quarter 2013 revenue growth of between 0% and 4% year-over-year. Growth prospects should improve in 2013, as office furniture shipments are forecast to rebound 3.4% from 2012, after contracting 0.9% last year. The stock, which is up 36% over the past three months, is trading at 14.5x forward earnings versus 18.6x for the furnishings industry. Billionaire Cliff Asness hiked his small stake in SCS by 50% in the third quarter of 2012 to $6.7 million, while Jim Simons trimmed his position by 25% to $4.6 million.

2. Daktronics Inc. (NASDAQ:DAKT) produces electronic display systems for sports, transportation and commercial markets. It has a dividend yield of 2.0%, payout ratio of 39%, and five-year annualized dividend growth of 65.3%. The company has been paying large special dividends. Analysts forecast the company's long-term EPS CAGR at 10.0%, reversing the trend of negative growth, on average, over the past five years. The stock has seen substantially positive EPS estimate revisions over the past three months. Its fiscal 2013 and fiscal 2014 EPS estimates have been revised up by 25.5% each over the past three months. With 23% of total assets in cash, this company recently agreed to acquire a Belgian company OPEN Out-of-Home Solutions (NASDAQ:OPEN), which is a leader in light boxes and scrollers, advertising signs and billboard advertising displays to third-party advertising companies. Daktronics Inc. shares are somewhat pricey, trading at 19.8x forward earnings versus 16.4x for its respective industry. The stock is up 37% over the past three months. RenTech's Jim Simons held a small stake in DAKT at the end of the third quarter of 2012.

3. HNI Corporation (NYSE:HNI), the second-largest office furniture manufacturer in the world, has a dividend yield of 3.0%, payout ratio of 69%, and five-year annualized dividend growth of 3.4%. Analysts forecast the company's long-term EPS CAGR at 8.0%, a reversal of negative EPS growth, on average, over the past five years. The company guided its 2013 non-GAAP EPS at between $1.30 and $1.50, a large jump from the 2012 non-GAAP EPS estimate of between $1.13 and $1.19. Again, the projected U.S. furniture shipments growth of 3.4% in 2013 from last year will support the expansion this year. Accelerating employment growth and improvements in office construction bode well for the company's prospects. Moreover, HNI Corp. sees "significant growth opportunities in its international business." Assuming all its growth potential, this stock is still somewhat pricey, trading at a forward P/E of 24.3x its forward earnings versus 18.6x for its respective industry. However, HNI has a low price-to-sales ratio of 0.7. First Pacific Advisors LLC (check out its top picks) and Chuck Royce's Royce & Associates were the largest hedge fund investors in the stock at the end of the third quarter of 2012.

4. A. Schulman Inc (NASDAQ:SHLM), a provider of plastic compounds and resins for the packaging, automotive, consumer products, and industrial applications markets, has a dividend yield of 2.4%, payout ratio of 36%, and five-year annualized dividend growth of 4.0%. Analysts forecast the company's long-term EPS CAGR at 11.5%. The stock boasts a high free cash flow yield of 8.3%. SHLM accelerated the payment of its quarterly dividend into December 2012. Recently, Gabelli upgraded the stock from hold to buy, saying that, according to Streetinsider.com, "current valuation does not fully reflect the potential from Schulman's large European exposure." Moreover, analysts say that "the company has a conservative balance sheet with trailing net debt of $116 million and total debt of $223 million or 1.7x EBITDA." The stock is priced on a below-industry price-to-book of 1.9 and price-to-sales of only 0.5. Its forward P/E of 14.0x compares with 13.5x for Dow Chemical (NYSE:DOW) and 12.1x for DuPont (NYSE:DD). The stock is up 28% over the past three months. SCHL is one of value investor Chuck Royce's holdings.

5. Mine Safety Appliances (NYSE:MSA), a provider of products that enhance the safety and health of workers in a number of industries, has a dividend yield of 2.4%, payout ratio of 42%, and five-year annualized dividend growth of 4.8%. The company has raised dividends each year since 1972. In December 2012, MSA paid a special dividend of $0.28 per share. Analysts forecast the company's long-term EPS CAGR at a robust 15.1%. Calling it "cheap" and "with strong fundamentals," CNBC's "Mad Money" host Jim Cramer believes the company is a takeover candidate. Indeed, with a forward P/E of 14.9x, the stock is trading well below its five-year average multiple of 19.9x. However, the stock is trading at a price-to-book of 3.6 versus 2.7 for its industry on average. MSA has rallied 16.0% over the past three months. Chuck Royce and RenTech's billionaire Jim Simons held stakes in the stock at the end of the third quarter of 2012.

Source: 5 Small-Cap Dividend Stocks With Price Momentum