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Small Caps Need to be in Your Dividend Growth Portfolio

There's value in searching for small cap stocks that are not considered by large investors. Small-cap companies are tracked by fewer analysts and are often not appropriate for institutions because of the relatively small number of shares and small trade volume. Small-cap stocks tend to be issued by young, potentially fast-growing companies. Over the long term, small-cap companies have produced stronger returns than stocks in other investment categories. I use the definition that small-cap companies have a market capitalization between $100 million and $2.3 billion. Previously (Small-Cap Champions, Small-Cap Contenders), I featured selected small-cap companies that have paid increasing dividends for 10 years or more. Here, I look at small-cap companies that have increased their dividend for from 5 to 10 years.

Three Dividend Growth Challengers

Based on financial strength, safety (stability), dividend, dividend growth, and value, I selected three companies from the 49 small-cap Dividend Challengers in the December 31, 2013, CCC List (CCC List). The Challengers are companies that have paid a growing dividend for 5 years or more but have not achieved the Dividend Contenders' or Dividend Champions' 10-plus years of dividend growth.

Key characteristics of the three small-cap Dividend Challengers that I identified for further consideration are shown in the table.

Key Characteristics of Three Recommended Small-Cap Dividend Challengers
Company NameStock SymbolMarket Cap, million $Dividend Yield, percent4-yr DGR*, percent5-yr DGR*, percent
Orantini Financial CorpORIT6714.42131
Rent-A-Center, IncRCII1,7902.748N/A
Triangle Capital CorpTCAP7637.8119.3

*DGR, Dividend Growth Rate

I offer these small-cap Dividend Challengers as candidates for your due diligence and research. Please let me know what you find.

Oritani Financial Corporation (ORIT) is the holding company for a New Jersey state chartered bank offering a full range of retail and commercial loans and deposits. The Bank currently operates its main office and 24 full service branches in the New Jersey Counties of Bergen, Hudson, Essex and Passaic.

Rent-A-Center, Incorporated, (RCII) leases household durable goods to customers on a rent-to-own basis. The company offers durable products, such as consumer electronics, appliances, computers, furniture and accessories under rental purchase agreements. It owns and operates 3,120 stores in the United States, Canada, Mexico, and Puerto Rico; and 1,155 Rent-A-Center Acceptance kiosks in the United States and Puerto Rico (as of July 2013) . Rent-A-Center was founded in 1986 and is headquartered in Plano, Texas.

Triangle Capital Corporation (TCAP) invests capital in established companies with annual revenues between $20.0 million and $200.0 million, and EBITDA between $3.0 million and $35.0 million. Triangle seeks attractive returns by generating current income from debt investments and capital appreciation from equity related investments. Triangle typically invests $5.0 million to $35.0 million per transaction. Triangle has elected to be treated as a business development company. As a regulated investment company, Triangle distributes at least 90 percent of its "investment company taxable income" (ICTI) as dividends.

I Recommend only Three of the 49 Small-Cap Dividend Challenger Companies

I judged these three small-cap Dividend Challengers to be financially strong, to exhibit safety, to maintain an adequate dividend and dividend growth, and to be fairly priced. The following table gives a breakdown of the small-cap Challengers on the December 31 CCC List that meet each of my criterion.

The Number of Small-Cap Dividend Challengers from the 49 on the CCC List that Meet the Selection Criteria
CriterionChallengers Meeting the Criterion

Noteworthy Small-Cap Challengers that Meet the Criterion

Financial Strength20Quaker Chemical Co (KWR), Sturm Ruger & Co (RGR), WD-40 Company (WDFC)
Safety24EV Energy Partners LP (EVEP), Montpelier RE Holdings Ltd (MRH), National Enterprise Corp (NATL)
Dividend, Dividend Growth13American Science and Engineering Inc (ASEI), Daktronics Inc (DAKT), DeVry Inc (DV)
Value13Chemed Corp (CHE), Maiden Holdings Ltd (MHLD), PetMed Express Inc (PETS)
All Criteria3Oritani Financial Corp , Rent-A-Center, Inc , Triangle Capital Corporation

I judged a company to be financially strong if it is rated B+ or better by ValueLine, or has consistently increased revenue and earnings per share from 2008 to the present. Safe companies will have a ValueLine safety rating of 1 or 2 (out of 1 to 5), or a one-year annualized beta coefficient of less than 1.0. I considered the dividend and dividend growth to be adequate if the company has a Chowder score (see the CCC List) of 16 or greater. Finally, I judged companies to have value by comparing company earnings to its market capitalization relative to the historic price-to-earnings ratio for the company.

Some excellent companies did not meet the criteria that I set out. For example, the WD-40 Company is a small-cap Dividend Challenger that provides a wide range of consumer products worldwide (not just the cans of WD-40 we have on our work bench). ValueLine rates WD-40 as financially strong and safe. However, at $75.09 per share (closing on Jan 7, 2014), WD-40 is overvalued, in my estimation. Considering its historic price to earnings ratio of 28.6, the stock price would have to decline to $39.50 for me to view it as an attractive candidate for a dividend growth portfolio.

Vanguard Natural Resources (VNR), another small-cap Dividend Challenger, has been advocated recently (Another Sizable Deal seekingalpha.com/article/1929521-vanguar...) by the author concluding that VNR shares look very appealing, especially to dividend-oriented investors. However, I see that VNR does not have a history of consistently increasing revenue and earnings. Also, VNR has a beta coefficient greater than 1.0, and, so, does not possess the safety that I look for in recommending it for a dividend growth portfolio.

Comparing my Recommendations to Dividend Challengers that Exhibit Value

Mr Chuck Carnevale identified (Challenger Stars) 11 small-cap Dividend Challengers on the October 31, 2013, CCC List as "apparently fairly valued." My selection of TCAP is on his "fairly valued" list, but ORIT and RCII are not. ORIT share price decreased 5.3 percent between November 27, 2013 and January 7, 2014, making it more attractive now as a value investment. RCII qualified for the CCC List in November, 2013, and, therefore, recently became a small-cap Dividend Challenger that I then considered for a dividend growth portfolio.

Conclusion

For maintaining a dividend growth portfolio, I strongly recommend that you consider the dividend growth companies I identified here and in previously related articles (cited above). Small-cap companies tend to be youthful, fast growing, and more flexible then their larger counterparts. Small-cap companies can grow their dividends through your investment future.

Disclaimer

I provided analysis in this document for informational and educational purposes. My recommendations are a starting point for stock selection and should not be construed as a definitive position to buy or sell the stocks mentioned. The information in this document is believed to be accurate, but you should independently verify the status of a company before making a buy or sell decision. My commentary does not constitute investment advice. The information should only be factored into an investor's overall opinion forming process.

On Base

aka Marty Seitz

Source: Three Small-Cap Additions To Your Dividend Growth Portfolio