Payback periods were calculated for large cap stocks in prior articles and are calculated here for small cap stocks with dividend yields exceeding Treasury yields. Payback period estimates depend on earnings growth and dividend payout ratios. Changes to dividend yield were 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.
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.)
Small 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 |
Community Bank System | 3.9% | 50.6% | 9.7% | 10.0% | |
Diebold Incorporated | 3.9% | 37.3% | 6.6% | 11.0% | |
Empire District Electric | 4.7% | 38.8% | -1.5% | 10.2% | |
FirstMerit | 4.6% | 56.3% | -1.2% | 7.0% | |
Koppers Holdings | 2.7% | 43.0% | 36.9% | 17.0% | |
Kronos Worldwide | 4.4% | 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% | |
Nacco Industries | 4.3% | 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 | 8.0% | 43.9% | 9.7% | 5.7% | |
Quality Systems | 4.1% | 57.3% | 16.3% | 15.8% | |
Sauer-Danfoss | 3.6% | 16.5% | 33.5% | 14.0% | |
Strayer Education | 6.9% | 55.5% | 19.7% | 3.9% | |
True Religion Apparel | 3.1% | 22.1% | 14.3% | 20.0% |
Many small cap stocks have distribution rates which are high enough that the sum of future dividends would equal your initial investment inside of two decades:
Ticker | Industry | P/E | P/B | Return on Equity | Payback Period |
CBU | Regional - Northeast Banks | 13.44 | 1.22 | 9.7% | 19 |
DBD | Business Equipment | 9.71 | 2.19 | 21.4% | 18 |
EDE | Electric Utilities | 16.67 | 1.3 | 8.0% | 19 |
FMER | Regional - Midwest Banks | 12.24 | 0.95 | 7.8% | 19 |
KOP | Specialty Chemicals | 16.93 | 6.11 | 35.9% | 19 |
KRO | Specialty Chemicals | 4.28 | 1.52 | 39.2% | 17 |
MAIN | Diversified Investments | 8.82 | 1.76 | 19.2% | 13 |
MANT | Security Software & Services | 7.13 | 0.73 | 10.7% | 18 |
NC | Farm & Construction Machinery | 3.35 | 0.69 | 22.0% | 15 |
NWE | Diversified Utilities | 13.91 | 1.45 | 10.6% | 18 |
OLN | Specialty Chemicals | 11.11 | 1.6 | 15.0% | 18 |
PSE | Oil & Gas Drilling & Exploration | 5.44 | 3.45 | 82.0% | 10 |
QSII | Healthcare Information Services | 14.09 | 3.33 | 25.9% | 16 |
SHS | Diversified Machinery | 9.27 | 3.43 | 40.0% | 17 |
STRA | Education & Training Services | 7.77 | 9.91 | 159.5% | 12 |
TRLG | Textile - Apparel Clothing | 13.97 | 2.1 | 15.9% | 19 |
The payback period answers the following question "How long would it take for a dividend-paying stock to pay back the stock's original price?" The time it takes for an investment's cash outflows to sum to the original outlay is called the payback period, and it is considered a simplistic and crude measure of risk.
These rough estimates illustrates how long you might have to wait to get paid back. If you consider payback calculations useful, these calculations should help you realize how long you will have to wait.
The payback period is widely hated by financial professionals but is a simple metric laypeople instinctively use when evaluating an investment. Notice that the payback period fails to account for how dividend distributions in earlier years are worth more than the same dollar value paid out later in the future. You would be able to reinvest the earlier distribution and earn a return on it, making it worth more. Even worse, it ignores whatever price you would reap upon reselling the stock.
If you hate this metric, estimates of the payback period to show that investors will often have to wait a long time to get paid back. These results should encourage laypeople to consider other investment evaluation methods. It seems that investors can't live on dividends alone.
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 small cap stocks would require at least a decade for payback, investors should rethink a singular focus on dividends before investing. Essentially, investors must consider capital gains as a source of returns since there are no dividend stocks (at least in the small cap space) that provide compelling dividend-only returns.
Dividend investors are stuck considering total return including capital appreciation. 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
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
