R. Brent Byrne On Dividend-Paying Small Cap Stocks

On January 22, The Wall Street Transcript interviewed R. Brent Byrne, President and CEO of Divi-Vest Advisors, on investing in dividend-paying stocks. Key excerpts follow:

TWST: When you first started in this dividend business, it was mostly just the large caps, but now even small cap companies are dividend-paying. Have you noticed a burgeoning of dividend-paying companies and more interest because of the tax relief?

Mr. Byrne: Obviously, there is more incentive for companies to reward shareholders. That's the whole idea with stocks - reward the shareholder. It's what keeps shareholders coming back. Raising dividends is just one facet of rewarding shareholders, and certainly with the tax advantage, it encourages more interest in this whole dividend thing. Since I've been in business, there have always been great stocks paying high yield. So I haven't really noticed a surge in opportunities versus 20 years ago. There were always great companies to invest in that have those attributes that we are looking for.

I would say that there is more interest in the investment community nowadays, because many dividend-paying stocks held up well in the bear market. It's easy to make money in a bull market - the tough part of investing in stocks for the long term is navigating the bear markets. To the extent that you invest in high dividend-paying stocks, you are going to have somewhat of a protective zone around your portfolio when you go into tough times. The tax incentive is important; also, after you've done some homework on what happened in the bear market, you come to the conclusion that maybe you should have dividends in your portfolio.

Coming into the bear market of 2000, we knew that if we got into tough times in the stock market, our portfolios would hold up well. We didn't know that we would actually keep rising in the bear market. We knew we would hold up well, but actually furthering the ball through it was somewhat of a surprise, but a very welcome one for our investors.

TWST: Would you tell us about those two small cap companies? We don't hear much about dividend-paying small cap companies.

Mr. Byrne: What I like about American Software (AMSWA) and Traffix (TRFX) is that they have little or no debt. But in the case of American Software, at the current quote, they pay approximately 4.5%, which is over twice what the S&P 500 pays. Traffix pays in the neighborhood of 5.9% at the current quote. So with both companies, you are being rewarded to hold and sit tight, while these two management teams hopefully boost earnings and profitably execute their growth strategies.

What I look for in smaller companies is a little less leveraged environment where you are not saddled with a lot of debt. When small companies run amuck or get into trouble with too much debt, it's not a good sign going forward. But if large companies get into trouble with a lot of debt, there are many things that they can do because of their size, their ties with Wall Street and their brand recognition. Traffix and American Software are asset-rich companies with low debt, good yields and exciting growth stories. We like these stocks.

Another stock that looks pretty attractive here is Briggs & Stratton (BGG). Westwood One (WON) is an interesting story to consider. They've cut their dividend, but that presents an intriguing opportunity as well.