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Diversification is an important part of investing, and though many dividend growth investors diversify across industries and corporate structures, one area that is often overlooked is market cap. Most of the companies that we focus on are large cap, blue chip-type stocks, since they usually offer higher yields and more consistent dividend growth. But our diversification would not be complete if we did not include mid- and small cap stocks, especially if we are interested in capturing the amazing growth that a well-run, smaller company can provide.

While it is generally thought that smaller companies need all their earnings retained in order to fuel growth, countless examples abound proving that this is not true. Just look at the growth of companies like Wal-Mart (WMT), which has grown substantially in the past 40 years while maintaining its dividend. Same goes for companies like 3M (MMM) and Coca Cola (KO). And though they may not have necessarily been a small cap 50 years ago, they still managed amazing growth throughout the years on only their retained earnings.

I've recently begun further investigation into smaller cap companies with healthy yields and growing dividends, and have come across a few that are promising. I've been looking at three criteria: One, I've avoided financial companies and banks, which make up the majority of small cap stocks that pay good dividends. That's primarily because their businesses are difficult to evaluate and I don't feel comfortable with them. Second, since I've found consistent dividend increases are pretty difficult to come by in this area, I look for companies that have not cut their dividends recently, even if they have a few years of a stagnant payout. And third, I'm looking for a good yield - at least above 2%, even better is 2.5% - 3%. So without further ado, here are 10 small cap companies that meet this criteria.

Quaker Chemical Corp (KWR)

Market Cap - 487 million
Current Price - 42.25
Current Yield - 2.2%

Quaker Chemical Corporation develops, produces, and markets a range of formulated chemical specialty products for various heavy industrial and manufacturing applications and, in addition, offers and markets chemical management services (CMS). Quaker’s principal products and services include rolling lubricants; corrosion preventives; metal finishing compounds; machining and grinding compounds; forming compounds; and hydraulic fluids.

Methode Electonics Inc. (MEI)

Market Cap - 444 million
Current Price - 12.04
Current Yield - 2.3%

Methode Electronics, Inc. is a global designer and manufacturer of electro-mechanical devices. The company designs, manufactures and markets devices employing electrical, radio remote control, electronic, wireless, sensing and optical technologies. The company operates in four segments: Automotive, Interconnect, Power Products and Other.

Acme United Corp (ACU)

Market Cap - 28 million
Current Price - 9.31
Current Yield - 2.6%

Acme United Corporation is a supplier of cutting, measuring and safety products to the school, home, office, hardware and industrial markets. The company’s operations are in the United States, Canada, Europe (located in Germany) and Asia (located in Hong Kong and China).

Frisch's Restaurants Inc. (FRS)

Market Cap - 114 million
Current Price - 23.20
Current Yield - 2.6%

Frisch’s Restaurants, Inc., is a regional company that operates full service family-style restaurants under the name Frisch’s Big Boy. The company also operates grill buffet style restaurants under the name Golden Corral, pursuant to certain licensing agreements. As of June 1, 2010, the company’s operations consisted of 91 family-style restaurants using the Big Boy trade name and 35 Golden Corrals.

Lacrosse Footwear Inc.
(BOOT)

Market Cap - 110 million
Current Price - 17.01
Current Yield - 2.9%

LaCrosse Footwear, Inc. is a developer and marketer of footwear for work and outdoor users. Its work customers include people in law enforcement, transportation, mining, oil and gas, military services and other occupations. Outdoor customers include people active in hunting, hiking and other outdoor recreational activities.

Utah Medical Products Inc. (UTMD)

Market Cap - 105 million
Current Price - 29.13
Current Yield - 3.2%

Utah Medical Products, Inc. is in the business of producing medical devices that are disposable and for hospital use. UTMD markets a range of medical devices used in areas like the neonatal intensive care unit (NICU), the labor and delivery (L&D) department and the women’s health center in hospitals, as well as products sold to outpatient clinics and physician's offices.

PetMed Express Inc. (PETS)

Market Cap - 331 million
Current Price - 14.74
Current Yield - 3.4%

PetMed Express, Inc. and its subsidiaries, doing business as 1-800-PetMeds, is a pet pharmacy. The company markets prescription and non-prescription pet medications, and other health products for dogs, cats, and horses direct to the consumer.

Advocat
(AVCA)

Market Cap - 35 million
Current Price - 6.15
Current Yield - 3.6%

Advocat Inc. (Advocat) provides long-term care services to nursing home patients in eight states, primarily in the Southeast and Southwest United States. Advocat provides a range of long-term care services to the elderly, including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, it offers a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services.

Houston Wire and Cable Company
(HWCC)

Market Cap - 296 million
Current Price - 16.71
Current Yield - 2%

Houston Wire & Cable Company is a distributor of specialty wire and cable and related services to the United States electrical distribution market. The Company also offers private branded products, including the LifeGuard low-smoke, zero-halogen cable.

American Greetings Corporation (AM-OLD)

Market Cap - 964 million
Current Price - 24.03
Current Yield - 2.5%

American Greetings Corporation is engaged in the design, manufacture and sale of everyday and seasonal greeting cards and other social expression products. Greeting cards, gift wrap, party goods, stationery and giftware are manufactured or sold by the company in North America, including the United States, Canada and Mexico, and throughout the world, primarily in the United Kingdom, Australia and New Zealand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 10 Unknown Small Cap Stocks With Healthy Yields