There is a common misconception among investors that small companies do not pay dividends. This notion assumes large caps are mature companies flush with cash, and that companies with tiny market capitalizations are cash-strapped start-ups. This is simply not true -- research featured in this article discovered 27 micro cap stocks with payback periods under 20 years, more than the 19 large caps that have payback periods inside of two decades.
Micro Cap Stock Payback Period Calculations
The number of years it takes for an investment to pay you back is called the payback period. Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback could take based on dividend payments.
Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:
- Earnings growth over the past five years
- Analyst estimates for earnings growth for the next five years
- Return on equity times the earnings reinvestment rate
The minimum of these measures was then used to estimate dividend growth for the next three years.
Micro caps were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield and payout ratios below 60%. The values of these inputs are provided below:
Ticker | Company | Div Yield | Payout Ratio | EPS Growth Past 5 Years | EPS Growth Next 5 Years |
Alliance Resource Partners | 6.7% | 53.1% | 15.1% | 7.0% | |
Arrow Financial | 4.0% | 53.8% | 6.0% | 6.9% | |
Community Bank System | 3.9% | 50.6% | 9.7% | 10.0% | |
Dime Community Bancshares | 4.0% | 41.7% | 9.9% | 2.3% | |
Destination Maternity | 3.6% | 55.1% | 16.6% | 18.0% | |
Guess' | 3.2% | 31.8% | 16.5% | 11.6% | |
GameStop | 4.4% | 12.6% | 19.3% | 8.9% | |
Koppers Holdings | 2.8% | 43.0% | 36.9% | 17.0% | |
Kronos Worldwide | 4.1% | 18.7% | 27.1% | 5.5% | |
Main Street Capital | 6.1% | 50.8% | 10.7% | 7.0% | |
ManTech International | 3.8% | 26.9% | 17.2% | 7.2% | |
Merchants Bancshares | 3.8% | 43.5% | 6.4% | 5.0% | |
Nacco Industries | 4.4% | 14.2% | 11.1% | 21.7% | |
Northwestern | 4.2% | 57.6% | 20.4% | 7.0% | |
Olin | 3.8% | 42.1% | 12.0% | 8.3% | |
Pioneer Southwest Energy | 7.9% | 43.9% | 9.7% | 5.7% | |
QC Holdings | 6.1% | 28.9% | 6.2% | 18.0% | |
Questcor Pharmaceuticals | 3.6% | 0.0% | 31.1% | 38.2% | |
Quality Systems | 3.9% | 57.3% | 16.3% | 15.8% | |
Republic Bancorp | 3.2% | 12.3% | 27.5% | 10.0% | |
Sauer-Danfoss | 3.6% | 16.5% | 33.5% | 14.0% | |
Strayer Education | 6.0% | 55.5% | 19.7% | 3.9% | |
TESSCO Technologies | 3.7% | 31.2% | 21.0% | 15.0% | |
True Religion Apparel | 3.1% | 22.1% | 14.3% | 20.0% | |
TTO | Tortoise Capital Resources | 4.9% | 58.4% | 1.0% | 7.0% |
Waddell & Reed Financial | 3.2% | 48.3% | 29.8% | 13.8% | |
Wayside Technology Group | 5.0% | 51.2% | 10.7% | 22.0% |
Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)
Many micro cap stocks have distribution rates that are high enough that the sum of future dividends would equal your initial investment inside of two decades:
Ticker | Industry | P/E | P/B | ROE | Payback Period |
ARLP | Industrial Metals & Minerals | 11.45 | 3.44 | 22.7% | 12 |
AROW | Regional - Northeast Banks | 13.74 | 1.74 | 12.9% | 18 |
CBU | Regional - Northeast Banks | 13.48 | 1.23 | 9.7% | 19 |
DCOM | Savings & Loans | 10.43 | 1.31 | 12.6% | 19 |
DEST | Apparel Stores | 15.24 | 2.55 | 17.5% | 19 |
GES | Apparel Stores | 9.8 | 2.02 | 20.7% | 19 |
GME | Electronics Stores | 9.69 | 1.02 | 11.2% | 16 |
KOP | Specialty Chemicals | 16.21 | 5.85 | 35.9% | 19 |
KRO | Specialty Chemicals | 4.5 | 1.6 | 39.2% | 18 |
MAIN | Diversified Investments | 8.74 | 1.74 | 19.2% | 13 |
MANT | Security Software & Services | 7.04 | 0.72 | 10.7% | 18 |
MBVT | Regional - Northeast Banks | 11.99 | 1.52 | 13.9% | 19 |
NC | Farm & Construction Machinery | 3.27 | 0.67 | 22.0% | 15 |
NWE | Diversified Utilities | 13.96 | 1.46 | 10.6% | 18 |
OLN | Specialty Chemicals | 11.34 | 1.63 | 15.0% | 18 |
PSE | Oil & Gas Drilling & Exploration | 5.48 | 3.47 | 82.0% | 10 |
QCCO | Savings & Loans | 4.58 | 0.67 | 15.5% | 13 |
QCOR | Biotechnology | 10.74 | 10.29 | 99.3% | 12 |
QSII | Healthcare Information Services | 14.61 | 3.45 | 25.9% | 16 |
RBCAA | Regional - Southeast Banks | 4.07 | 0.8 | 21.5% | 19 |
SHS | Diversified Machinery | 9.13 | 3.38 | 40.0% | 16 |
STRA | Education & Training Services | 8.95 | 11.4 | 159.5% | 14 |
TESS | Electronics Wholesale | 10.06 | 1.62 | 17.6% | 17 |
TRLG | Textile - Apparel Clothing | 14.01 | 2.11 | 15.9% | 19 |
TTO | Asset Management | 12.24 | 0.87 | 7.0% | 17 |
WDR | Asset Management | 15.96 | 4.72 | 31.1% | 18 |
WSTG | Computers Wholesale | 10.24 | 1.99 | 20.2% | 14 |
Conclusion
If you want to ignore what prices your securities fetch in the markets, you will be waiting a long time to get paid back. Since all the dividend micro cap stocks would require at least a decade for payback, investors should rethink a singular focus on dividends before investing.
What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check," they are stuck considering total returns, including capital appreciation. Fortunately, many of these stocks offer compelling low price-multiples, which are promising for future stock prices. However, to avoid value traps, investors should weigh how cheaply these dividend-paying stocks are trading against measures of quality. In short, prudent investment for income requires more than reading a stock's yield.
Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are. Please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.
