10 Small-Cap Dividend Stocks That Can Outperform The Market By A Big Margin

by: Arie Goren

Many small-cap companies pay dividends. As a matter of fact, 286 companies among the 600 companies that are included in the S&P SmallCap 600 index pay dividends, 146 of them have a dividend yield greater than 2% and 92 companies have a yield of over 3%.

I have searched for profitable companies that are included in the S&P SmallCap 600 that pay rich dividends, and that have raised their payouts at a very high rate over the last five years.

S&P SmallCap 600

Description from Standard & Poor's:

The S&P SmallCap 600 covers approximately 3% of the domestic equities market. Measuring the small cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

The screen's formula requires all stocks to comply with all following demands:

  1. Dividend yield is greater than 2.0%.
  2. The payout ratio is less than 100%.
  3. The annual rate of dividend growth over the past five years is greater than 5%.
  4. The PEG ratio is less than 2.0.
  5. Average annual earnings growth estimates for the next five years is greater or equal 8.0%.
  6. The 10 stocks with the highest dividend growth over the past five years among all the stocks that complied with the first five demands.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Portfolio123.

After running this screen on April 24, 2013, before the market open, I discovered the following 10 stocks: Cal-Maine Foods Inc (NASDAQ:CALM), Calavo Growers Inc (NASDAQ:CVGW), American Science and Engineering Inc. (NASDAQ:ASEI), Hillenbrand Inc (NYSE:HI), Infinity Property and Casualty Corp (NASDAQ:IPCC), Men's Wearhouse Inc. (MW), Healthcare Services Group Inc (NASDAQ:HCSG), MTS Systems Corp (NASDAQ:MTSC), ViewPoint Financial Group (VPFG) and Cracker Barrel Old Country Store Inc (NASDAQ:CBRL).

The table below presents the 10 companies, their last price, their market cap and their industry.

The table below presents the dividend yield, the payout ratio, the Trailing P/E, the forward P/E, the PEG ratio and the total debt to equity ratio for the 10 companies.

The table below presents the return on equity, the price-to-sales ratio, the price to book value, the long-term average annual earnings growth estimates and the past five years average annual earnings growth for the 10 companies.


In order to find out how such a screening formula would have performed during the last year, last five years and last 14 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

One year back-test

Five years back-test

14 years back-test


The small-cap dividend stocks screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests. The one-year return of the screen was at 30.44%, while the return of the S&P 500 index during the same period was at 15.50%. The 14-year average annual return of the screen was at 9.90%, while the average annual return of the S&P 500 index during the same period was only 1.77%. Although the past guarantees nothing, it does provide insight into how this screen has performed under various economic conditions over varying time frames.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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