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Small-cap stocks have done very well this year. The return of the S&P SmallCap 600 index year-to-date is at 33.62%, while the one year return of the index is at 37.72%. This is compared to15.82% the average annual return for the last three years and an average annual return of 20.49% for the last five years.

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In my previous posts (here and here), I described the best S&P 500 and the best S&P MidCap 400 dividend stocks according to Lynch principles. In this article, I describe the best small-cap dividend stocks which are included in the S&P SmallCap 600 index, according to the same principles.

A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems. I used one of them, the "All-Stars: Lynch," in this article. The ranking system is based on investing principles of the well-known investor, Peter Lynch.

The "All-Stars: Lynch" ranking system is quite complex, and it is taking into account many factors like trailing P/E, relative P/E, PEG ratio, institutional ownership, liabilities, sales growth and EPS growth, as shown in the Portfolio123's chart below.

In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.

The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into fifty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: Lynch" rank. This brings me to the conclusion that the ranking system is useful.

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After running the "All-Stars: Lynch" ranking system on the companies which are included in the S&P SmallCap 600 index and pay a dividend with a higher than 1% yield, on December 14, I discovered the twenty best dividend stocks, which are shown in the chart below. In this article, I describe the five best stocks according to this ranking system. In my opinion, these stocks can reward an investor a significant capital gain along with a solid dividend. I recommend readers use this list of stocks as a basis for further research. All the data for this article were taken from Yahoo Finance, Portfolio123 and finviz.com.

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HCI Group, Inc. (NYSE:HCI)

HCI Group, Inc., an insurance holding company, provides property and casualty insurance in Florida.

HCI Group has a very low debt (total debt to equity is only 0.24), and it has a very low trailing P/E of 8.47 and a very low forward P/E of 10.33. The price-to-cash ratio is extremely low at 1.82, and the price to free cash flow for the trailing 12 months is also very low at 4.93. The forward annual dividend yield is at 2.36%, and the payout ratio is only 13.40%.

The HCI stock price is 4.65% above its 50-day simple moving average and 35.08% above its 200-day simple moving average. That indicates a mid-term and a long-term uptrend.

HCI Group has recorded strong revenue and EPS growth during the last year, the last three years and the last five years, as shown in the table below.

The tables below emphasize the HCI Group's superior growth rates, margins and return on capital parameters over the industry median, the sector median and the S&P 500 median.

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Most of HCI Group's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the table below.

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Source: Portfolio123

On October 22, HCI Group announced that in an effort to distribute more profit among shareholders, the board of directors of HCI Group increased its dividend by 22.2%. The company will now pay a quarterly dividend of 27.50 cents per share, up from 22.50 cents paid on September 23, 2013.

On November 05, HCI Group reported its third-quarter financial results, which beat EPS expectations by $0.35. The company reported that income available to common stockholders in the third quarter of 2013 totaled $13.4 million or $1.13 diluted earnings per common share, compared with $2.8 million or $0.27 diluted earnings per common share in the third quarter of 2012.

HCI has recorded very strong revenue and EPS growth, and considering its compelling valuation metrics, and the fact that the stock is in an uptrend, HCI stock can move higher. Furthermore, the rich growing dividend represents a nice income.

Main risk to HCI stock is big losses in the event of severe hurricane storms.

HCI Dividend Chart

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Chart: finviz.com

CryoLife Inc. (NYSE:CRY)

CryoLife, Inc. preserves and distributes human tissues for transplantation in the United States and internationally.

CryoLife has no debt at all, and it has a trailing P/E of 30.70 and a forward P/E of 26.45. The current ratio is very high at 4.20, and the average annual earnings growth estimates for the next five years is at 4%. The forward annual dividend yield is at 1.09%, and the payout ratio is only 31.8%.

The CRY stock price is 10.28% above its 50-day simple moving average and 49.97% above its 200-day simple moving average. That indicates a mid-term and a long-term uptrend.

Analysts recommend the stock. Among the three analysts covering the stock, two rate it as a strong buy and one rates it as a hold.

CryoLife has recorded moderate revenue and EPS growth during the last year, the last three years and the last five years, as shown in the table below.

Most of CryoLife's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the tables below.

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Source: Portfolio123

On October 29, CryoLife reported its third-quarter financial results, which beat EPS expectations by $0.07 and beat on revenues.

Third-Quarter 2013 Highlights

  • Net income increases 106 percent to $3.2 million, or $0.11 per share
  • Product revenues grew 11 percent year-over-year to $18.8 million
  • Tissue processing revenues grew 6 percent year-over-year to $17.4 million
  • BioGlue revenues grew 12 percent year-over-year to $14.2 million
  • Revascularization technologies revenues grew 14 percent year-over-year
  • In October, received $15.4 million for shares of Medafor common stock due to C.R. Bard's acquisition of Medafor; potential for additional payments of up to $8.4 million

CryoLife has recorded revenue and EPS growth, and considering its latest quarter good financial results, and the fact that the stock is in an uptrend, CRY stock can move higher. Furthermore, the solid dividend represents an income.

CRY Dividend Chart

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Chart: finviz.com

Schweitzer-Mauduit International Inc. (NYSE:SWM)

Schweitzer-Mauduit International, Inc. manufactures and sells paper and reconstituted tobacco products to the tobacco industry; and specialized paper products for use in various applications.

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Source: Company Overview Presentation

Schweitzer-Mauduit has a very low debt (total debt to equity is only 0.27), and it has a low trailing P/E of 13.89 and a very low forward P/E of 12.39. The PEG ratio is very low at 0.93, and the current ratio is very high at 3.70. The price to free cash flow for the trailing 12 months is very low at 13.56, and the average annual earnings growth estimates for the next five years is very high at 15%. The forward annual dividend yield is at 2.96%, and the payout ratio is only 32.1%. The annual rate of dividend growth over the past five years was very high at 31.71%.

Schweitzer-Mauduit has recorded strong EPS and dividend growth and mild revenue growth during, the last three years and the last five years, as shown in the table below.

The tables below emphasize Schweitzer-Mauduit's superior margins and return on capital parameters over the industry median and the sector median.

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On November 06, Schweitzer-Mauduit reported its third-quarter financial results, which missed EPS expectations by $0.01 and missed on revenues.

Third quarter / Year-To-Date Financial Highlights:

  • Third quarter net sales of $185.3 million decreased 5% versus the prior-year quarter; year-to-date net sales were $576.3 million
  • Third quarter operating profit of $41.8 million decreased from $49.4 million in the prior-year quarter; $125.6 million year-to-date
  • Third quarter Adjusted Operating Profit from Continuing Operations (see non-GAAP reconciliations) of $42.4 million decreased from $47.4 million in the prior-year quarter; $128.5 million year-to-date
  • Net income of $29.1 million in the third quarter, an increase of $1.4 million from the prior-year quarter; year-to-date net income of $85.8 million
  • Third quarter Adjusted Diluted Earnings Per Share from Continuing Operations (see non-GAAP reconciliations) was $0.95, and $2.91 year-to-date

Worldwide cigarette consumption is shifting from west to east; China alone is responsible for 39% of world production, as shown in the table below.

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Source: Company Overview Presentation

Schweitzer-Mauduit has recorded good revenue, EPS and dividend growth, and it has compelling valuation metrics and strong earnings growth prospects. Although the company's last report disappointed investors, and the SWM stock fell 15% the day after, in my opinion, the reaction was exaggerated, and SWM stock can move higher. Furthermore, the rich dividend represents a nice income.

Since the company is rich in cash ($7.16 a share), has a low debt and its payout ratio is very low, there is hardly a risk that the company will reduce its dividend payment.

Risks to the expected capital gain and to the dividend payment include decline in the worldwide cigarette consumption due to new anti-smoking regulation.

SWM Dividend Chart

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Chart: finviz.com

Questcor Pharmaceuticals, Inc. (QCOR)

Questcor Pharmaceuticals, Inc., a biopharmaceutical company, provides drugs for the treatment of multiple sclerosis, nephrotic syndrome, and infantile spasms indications.

Questcor Pharmaceuticals has a very low debt (total debt to equity is only 0.04), it has a low trailing P/E of 12.37 and a very low forward P/E of 7.86. The PEG ratio is very low at 0.48, and the average annual earnings growth estimates for the next five years is very high at 26%. The price to free cash flow for the trailing 12 months is very low at 12.07. The forward annual dividend yield is at 2.25%, and the payout ratio is only 15.5%.

Analysts recommend the stock. Among the ten analysts covering the stock, six rate it as a strong buy, three rate it as a buy, and only one rates it as a hold. Questcor Pharmaceuticals has recorded very strong revenue and EPS growth, during the last year, the last three years, and the last five years, as shown in the table below.

The tables below emphasize the Questcor Pharmaceuticals' superior growth rates, margins and return on capital over the industry median, the sector median and the S&P 500 median.

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Source: Portfolio123

On October 29, Questcor Pharmaceuticals reported its third-quarter financial results, which beat EPS expectations by $0.32 and beat on revenues. Net sales for the third quarter ended September 30, 2013 were $236.3 million, up 68 percent from $140.3 million in the third quarter of 2012. The increase was driven by the expanded usage of H.P. Acthar® Gel (repository corticotropin injection) in multiple therapeutic areas. GAAP earnings for the third quarter of 2013 were $1.52 per diluted common share, up 67 percent from $0.91 per diluted common share in the third quarter of 2012.

Questcor Pharmaceuticals has recorded very strong revenue and EPS growth, and it has very strong earnings growth prospects, and considering its compelling valuation metrics, QCOR stock can move higher. Furthermore, the solid dividend represents a nice income.

QCOR Dividend Chart

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Chart: finviz.com

AMCOL International Corporation (NYSE:ACO)

AMCOL International Corporation engages in the development and application of minerals and technology products and services to various industrial and consumer markets.

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Source: AMCOL Investor Relations Presentation August 2013

AMCOL International has a trailing P/E of 43 and a very low forward P/E of 13.07. The current ratio is very high at 3.60, and the average annual earnings growth estimates for the next five years is quite high at 12.50%. The price-to-sales ratio is very low at 0.98. The forward annual dividend yield is at 2.66%, and the payout ratio is at 87.9%.

AMCOL International has recorded revenue, EPS and dividend growth during the last three years and the last five years, as shown in the charts below.

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Source: AMCOL Investor Relations Presentation August 2013

On October 25, AMCOL International reported its third-quarter financial results, which beat EPS expectations by $0.03 and was in-line on revenues. The company reported $0.61 of diluted loss per share attributable to AMCOL shareholders including $1.21 per share of non-cash impairment charges from its South African chromite and health and beauty operations. Excluding the impairments, AMCOL realized $0.60 of diluted earnings per share, comparable to the $0.59 per share earned in the prior year's quarter. Net sales increased $14.3 million, or 5.7%, to $263.5 million in the 2013 third quarter. While gross profit increased $0.9 million, gross profit margin decreased 120 basis points to 26.4%.

AMCOL International has recorded revenue, EPS and dividend growth, and considering its strong earnings growth prospects, ACO stock can move higher. Furthermore, the solid dividend represents a nice income.

ACO Dividend Chart

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Chart: finviz.com

Disclosure: I am long HCI. 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.

Source: Best Small-Cap Dividend Stocks According To Lynch Principles