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Most people think of giant value companies with reduced growth and high cash-flow as being the typical blue chip dividend paying stock. But tiny stocks can also deliver high yielding income payouts. The benefit of picking small cap companies with large dividends is the added exposure to capital gains in addition to the income strategy.

The small cap effect is highlighted in the Fama and French paper, Value Versus Growth: The International Evidence (1997). This team of researchers have provided empirical data that show smaller cap companies (both value and growth) as historically outperforming larger cap stocks.

Our stock scan will try to give income investors a healthy capital gain potential to compliment their dividends. Our criteria is as follows:

  • Price under $10
  • Small cap or below 2 billion market capitalization
  • Dividend yield above 5%
  • Price to Free Cash Flow under 30
  • Price went up over the past 3 months
  • Excluding funds (stocks only)

(If you like strong free cash flow in your dividend stocks, you may want to read this article.)

The Pre-screened High Yielding Small Cap Stocks

The below list of small cap stocks under $10 should have some decent yields associated with them. (Data using the FINIZ screener)

Ticker

Market Cap

Dividend Yield

MNDO

59.94

10.00%

KCAP

191.72

8.08%

HIMX

460.06

9.73%

EROC

819.02

6.20%

UVE

224.84

6.97%

OTCQB:KEYP

315.54

6.57%

PFBI

54.71

6.39%

EDUC

26.13

8.96%

DHT

229.92

8.51%

GAIN

176.64

6.00%

MCGC

548.51

7.81%

HRZ

116.5

5.28%

Momentum of Small Cap Stocks

The theory behind momentum is that previous winning stocks will also be future winning stocks. This can be scanned over the past 3 – 12 months. In our next table, we will look at the highest price jumpers over the past 3, 6, and 12 months to see which of these might have a strong upside potential over the corresponding holding period.

Ticker

3 Months

6 Months

12 Months

Price

MNDO

54.59%

93.94%

150.00%

3.2

KCAP

29.54%

71.14%

84.65%

8.42

HIMX

23.56%

6.20%

-7.89%

2.57

EROC

22.84%

64.91%

83.33%

9.68

UVE

17.86%

41.03%

-0.17%

5.74

OTCQB:KEYP

16.10%

39.09%

27.44%

5.48

PFBI

12.03%

2.07%

-6.89%

6.89

EDUC

11.85%

22.49%

18.37%

6.7

DHT

9.30%

29.83%

30.56%

4.7

GAIN

4.58%

40.11%

56.25%

8

MCGC

4.52%

41.70%

48.14%

7.17

HRZ

3.84%

-3.81%

-8.89%

3.79

A Few Financial Ratios

  • Stocks with the highest profit margins: GAIN (126.7%), MNDO (24.42%), PFBI (21.71%).
  • Stocks with the highest return on equity: KEYP (49%), UVE (22%), MNDO (20.8%), GAIN (18.34%), PFBI (10.35%).
  • Stocks with the lowest price to sales ratio under 1: HRZ (0.10), HIMX (0.72), KEYP (0.79), EDUC (0.94), and UVE (0.99).
  • Lowest price to book ratios are: KEYP (0.24), PFBI (0.41), GAIN (0.89), MCGC (0.91), and KCAP (0.95).

Capital Gains and Big Dividends?

Does this mean big gain and little downside? Not necessarily. Smaller stocks can also be more volatile. Beta is one measure to see how closely linked these stocks are to the market. While a few have higher beta than the market, some have much lower beta despite having big yields and good upside potential. This might suggest strong alpha when a portion of the excess gains (dividends plus capital gains) are not directly tied to beta.

  • The stocks with the lowest beta are PFBI (0.31), EROC (0.66), DHT (0.77), UVE (0.78), EDUC (0.81), and GAIN (0.88).

(You might also like to read about 10 'Buy Rated' Income Stocks with Increasing Dividends).

But for investors who want the potential for strong capital gains in small cap stocks that pay high yielding dividends, this list of 12 stocks might hold the key. What is your take on this strategy: a good mix of income and growth or a clash of two ideals?

Source: 12 Small Cap High Yielding Dividend Stocks Under $10