Finding Value In Low-Payout, Less Liquid Dividend Growth Stocks

by: Jeff Paul

I recently published a research-based article on high-yield, low-payout stocks outperforming the overall market, and built a model portfolio to test the theory. SA readers added excellent insights in the comment threads. The portfolio methodology excluded smaller-cap CCC stocks, as I sought more established firms with sufficient trading volume - in case we all wanted to go buy them! However, there were some interesting smaller-cap stocks that I wanted to share, as well as additional reasons for researching them further and potentially purchasing them.

The Stocks

  • Landmark Bancorp (NASDAQ:LARK) is a regional bank holding company for Landmark National Bank, located in Kansas.
  • Span-America Medical Systems (NASDAQ:SPAN) manufactures and distributes therapeutic support products for medical, consumer, and industrial markets.
  • Ecology & Environment, Inc. (NASDAQ:EEI) is a worldwide environmental consulting firm. It performs analyses and evaluations to help clients assess and manage the environmental impact of projects or incidents.
  • MOCON, Inc. (NASDAQ:MOCO) develops, manufactures, markets, and services measurement, analytical, and monitoring products to detect, measure, and analyze gases and other chemical compounds, and provides related consulting services.

Historical Performance Summary

(Yrs of consistent div growth)



Payout Ratio

3-YR Div Growth Rate

1-YR Return*

5-YR Return*

10-YR Return*

Landmark Bancorp (10)








Span-America Medical Systems (13)








Ecology & Environment Inc (6)








MOCON Inc (9)








S&P 500 Index






*Total Returns are annualized rates. Data from Yahoo Finance as of Feb 23, 2012.

As observed in the table above, each of these four CCC stocks has a medium or high yield, based on the cutoffs that I established in my previous payout-yield article, and most fall into the low payout category, with Landmark Bancorp being pretty close. Each firm has a record of consistently raising dividends. Though their 3-YR DGRs are not super high, they are certainly sustainable given the low payout ratios, and there is room for higher growth. These stocks have all delivered total returns that beat the S&P; Landmark was an exception for its 5-YR return, but as a bank, that is not unexpected considering the financial crisis, and it wasn't much lower than the SPY's 5-yr return.

Small cap stock data
The Liquidity Factor

As observed in the table above, these stocks all have fairly low market capitalizations and very low daily trading volumes; they are less liquid than big name stocks. While I avoided these stocks for my model portfolio because of the lack of liquidity, the illiquidity may be a source of value. The Fama-French model found that small-cap, value stocks outperformed other categories. In a more recent research study, Robert Ibbotson, a Yale finance professor, found that illiquid stocks tended to outperform more liquid stocks (Source: Jackass Investing by Michael Dever). He offered three explanations for this:

  1. Investors prefer liquid stocks to illiquid stocks, therefore they pay a premium for liquidity, making those stocks overpriced.
  2. As the supply of capital grows, all stocks become more liquid, but the least liquid stocks receive the greatest relative benefit.
  3. More popular stocks attract more interest and attention, which results in less chance to score outsized future price gains.

In general, I believe the selected stocks fall into this category. I hadn't heard of any of them before, and I'm guessing most readers haven't either. Analyst information is more limited; there was no 5-YR earnings growth rate projection for any of these stocks in the CCC table. They have pretty low trading volume, and are close to book value, except for MOCO. Likewise, the PE ratios are all around 11.5, except MOCO. Note that MOCO was up $1.52 today because they raised their dividend, so as of the previous day, the PE was 16. In theory, if these stocks continue to grow and perform well, and to raise their dividends, they should attract more attention from institutional managers and analysts. Increased demand for the stock will benefit the price, leading to above market average performance. For income investors, this is an added bonus to the decent, consistently growing dividends offered by these stocks.

Other Notes of Interest

  • LARK: With the exception of 2010, LARK has had 5% stock dividends (105:100 splits) each year since 2001. This is in addition to the dividend, and the performance values above adjust for these splits. Also, many insiders have been purchasing the stock recently around the $16.00 to $17.50 level over the last year.
  • SPAN: One director bought shares last week at $16.87, but two officers also sold shares around the same price.
  • EEI: Insiders have been purchasing EEI around $16.50 to $17 in the last 5 months.
  • SPAN, EEI, and MOCO each have very little or no debt.
  • SPAN reported strong quarterly results on Feb 2. The other three firms have earnings reports coming up in the next 3-4 weeks.


The high-yield, low-payout strategy makes a lot of sense and is supported by back-tested research. While most income investors will likely feel more comfortable with larger, better-known holdings, the CCC list contains many smaller-cap stocks with histories of consistent dividend increases that may be of interest. In addition, these smaller firms may benefit in the future from the lack of investor and analyst attention now. The four stocks discussed appear reasonably valued, have net insider buying, and have low payout ratios and sustainable dividends and dividend growth rates.

This is a rare article for me, in that for once, I don't own any of the stocks I've discussed. However, that is because I haven't been looking much at small-caps, so it is new learning for me as well! Of the four, I am most interested in LARK, as I have been looking for some financial firms to invest in. Community Bank System (NYSE:CBU) is another that I like. I am also interested in EEI as an alternative to Waste Management (NYSE:WM) in the industrial space. Environmental consulting appeals to me more than hauling trash, but the latter is a necessity and probably offers more stability.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CBU, EEI, LARK over the next 72 hours.