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Where can small dividend growth investor find alpha?

Where can small dividend growth investor find "alpha"?
Initially posted 7/30/2011

A small investor (i.e.person who handle own money without a financial advisor) competes with big investors such as mutual and pension funds, investment companies, etc. This competition is usually not fare because big investors have better access to information (direct contacts with firms and trade assocciations), non-free analyses (buy- and sell-side analysts), and usually computing power.

So there is the edge (or alpha using this WWW site terminology, although alpha of finance science is quite different animal) for a small investor?
I think the answer is - small companies without extensive analysts coverege. It is interesting that small companies (in terms of capitalization) often outperform big firms according to numerous studies.

A small dividend growth investor can rely on free gem - David Fish's list of U.S. Dividend Champions (see dripinvesting.org/Tools/Tools.asp and recent update at seekingalpha.com/article/272663-101-divi...), known as CCC list. Unfortunately the list does not have information about number of analysts for each company. In order to fill this gap I collected data from Yahoo.com and MSN.com which are summarized in the table below. Both mentioned WWW sites provides quartely and annual analyst estimations of future earnings and other financial data. In each case I used the maximum number analysts for each company.

Table: Analysts coverage for CCC companies (Data on 7/29/2011)

Symbol # Analysts
AAN 12
ABC 19
ABM 5
ABT 21
ACE 20
ACI 22
ACN 18
ACO 4
ACU 1
ADI 22
ADM 13
ADP 25
AFG 4
AFL 20
AFSI 7
AGL 8
AHGP 4
AIN 4
AIZ 10
AJG 12
ALB 11
ALE 4
ALNC 2
ALOT 0
ALTE 9
AM 1
AMP 13
ANDE 6
AOS 8
APD 19
APOG 7
APU 7
ARG 16
ARLP 9
AROW 1
ARTNA 4
ASBC 14
ATNI 5
ATO 9
ATR 9
ATRI 1
AUBN 1
AVA 6
AVP 16
AVY 8
AWH 10
AWR 6
AXS 15
AZN 8
BA 28
BAC 27
BANF 2
BBL 3
BBT 35
BBY 24
BCR 22
BDMS 0
BDX 19
BEC 0
BEN 19
BF-B 10
BG 14
BGH 0
BHB 2
BHP 4
BKE 11
BKH 7
BMI 7
BMRC 7
BMS 11
BOBE 7
BOH 15
BOKF 9
BPL 10
BRC 8
BRO 15
BUD 10
BWL-A 0
BWP 12
BXS 13
CAH 21
CASS 1
CASY 7
CAT 19
CB 22
CBRL 9
CBSH 11
CBU 7
CCNE 3
CEO 4
CFR 18
CHCO 8
CHD 17
CHEV 1
CHFC 3
CHH 20
CHK 30
CHL 5
CHRW 28
CINF 6
CIZN 0
CL 23
CLC 6
CLX 17
CMA 25
CMI 15
CMLP 5
CMP 7
CNI 24
CNP 15
CNQ 12
COL 21
COLM 14
COP 20
COST 26
CPB 19
CPK 3
CPKF 1
CPNO 6
CPO 10
CR 6
CRR 14
CRRC 1
CRS 9
CSL 6
CSS 1
CSVI 0
CSX 29
CTAS 14
CTBI 4
CTL 17
CTWS 6
CVS 24
CVX 22
CWCO 2
CWT 8
CZFS 0
D 17
DAKT 5
DBD 9
DCI 11
DCM 2
DE 18
DEP 7
DFG 6
DGAS 1
DGICA 1
DGICB 0
DHR 20
DLR 17
DNB 10
DOV 10
DPL 6
DPM 8
DRI 31
DUK 19
DV 22
EBTC 0
ECL 18
ED 19
EEI 1
EFSI 1
EGAS 1
EGN 10
EGP 14
EIX 14
ELS 6
EMR 21
ENB 7
ENSI 0
EOC 5
EOG 29
EPD 12
EPE 0
EPHC 1
ERIE 1
ESS 24
ETE 5
ETP 12
EV 14
EVEP 7
EXLP 6
EXPD 20
FAST 12
FCAP 0
FDO 24
FDS 8
FDX 28
FELE 2
FFIN 10
FII 11
FITB 31
FIX 5
FL 15
FLO 11
FLS 11
FMER 14
FNB 10
FPU 0
FRT 18
FUL 7
FULT 15
FUN 5
GBCI 11
GCI 12
GD 24
GE 15
GEF 5
GEL 5
GGG 7
GIS 20
GKSR 8
GMT 7
GNTX 12
GOLD 8
GPC 12
GPS 33
GRC 4
GTY 2
GWW 18
HARL 0
HAS 16
HB 7
HBOS 2
HCBK 18
HCC 11
HCP 18
HCSG 6
HEP 7
HGIC 5
HIFS 1
HNBC 0
HNI 5
HNZ 18
HOC 0
HON 20
HP 25
HRB 9
HRL 15
HRS 17
HSC 10
HSY 15
HWKN 1
IBM 25
IFF 13
IMO 4
INDB 6
INFY 17
INTC 49
IPCC 6
IRET 5
ISCA 7
ITC 9
ITT 18
ITW 16
JBHT 30
JCI 24
JCS 0
JJSF 4
JKHY 9
JNJ 23
JOYG 13
JW-A 3
K 22
KEY 27
KFT 19
KIM 19
KMB 17
KMP 15
KNX 25
KO 19
KOF 8
KR 21
LANC 5
LARK 0
LCNB 0
LDR 4
LECO 7
LEG 6
LG 2
LKFN 4
LLL 19
LLTC 23
LLY 21
LM 14
LMT 25
LNC 19
LNN 5
LNT 10
LOW 27
LSBK 0
LSTR 25
LZB 6
MAS 17
MATW 3
MCD 26
MCHP 16
MCY 6
MDP 8
MDT 29
MDU 8
MEOH 6
MGEE 1
MGRC 2
MHP 10
MI 0
MKC 12
MLM 20
MMLP 6
MMM 19
MMP 14
MNRO 7
MO 12
MO 12
MOCO 0
MOLX 15
MON 17
MPR 2
MSA 6
MSEX 3
MSFT 31
MSM 10
MTB 20
MUR 13
MWE 9
MXIM 27
MYE 3
NAL 0
NATI 6
NATL 5
NBL 24
NBTF 0
NC 1
NDSN 8
NE 37
NEE 23
NEU 5
NFG 10
NGLS 10
NHC 2
NHC 2
NHI 5
NJR 6
NKE 21
NKSH 2
NNN 10
NOC 22
NPBC 11
NPK 1
NRCI 2
NRGP 0
NRGY 11
NRP 8
NS 14
NSC 29
NSH 7
NSM 21
NST 11
NTRS 22
NTT 1
NU 14
NUE 17
NUS 10
NVO 4
NVS 6
NWFL 0
NWN 7
O 14
ODC 1
OFC 11
OGE 8
OHI 7
OKE 8
OKS 14
OMI 11
ONB 11
ORI 4
ORRF 3
OSG 16
OTTR 3
OVBC 0
OXY 22
OZRK 10
PAA 16
PAYX 23
PBCT 18
PBI 5
PCG 20
PEBO 2
PEG 15
PEP 19
PFE 21
PG 22
PGN 19
PGR 20
PH 16
PII 12
PLL 11
PNNT 14
PNR 16
PNY 6
POOL 10
POR 10
PPDI 13
PPG 9
PPL 14
PRE 17
PRGO 13
PRK 7
PRSP 19
PVR 5
PX 20
QCOM 36
QNBC 0
R 15
RAI 10
RAVN 1
RBA 15
RBC 12
RBCAA 2
RBN 8
RDS-A 7
RDS-B 7
RF 21
RGCO 0
RGLD 6
RHI 17
RLI 11
RNR 12
ROH 0
ROL 1
ROP 12
ROST 21
RPM 6
RSG 8
RTN 22
SAFM 10
SBSI 1
SCG 11
SCHW 21
SCL 2
SEIC 5
SEP 9
SFG 12
SHEN 2
SHPGY 17
SHW 15
SIAL 12
SJI 4
SJM 13
SJR 7
SJW 3
SKT 13
SLGN 10
SNH 10
SNN 8
SNV 26
SO 22
SOMH 1
SON 12
SPAN 0
SPH 7
SRCE 0
SRE 10
STBA 9
STE 7
STFC 4
STI 28
STON 3
STR 9
STRA 19
STT 21
SU 12
SUSQ 15
SVU 16
SWK 9
SWX 6
SWY 20
SXL 10
SXT 5
SYBT 5
SYK 35
SYY 10
T 32
TAC 5
TCLP 9
TDS 8
TE 19
TEF 2
TEG 7
TEVA 22
TFX 4
TGH 10
TGP 8
TGT 28
THFF 2
THG 6
THI 9
TIF 24
TJX 24
TK 9
TLP 4
TMK 15
TMP 4
TNC 3
TOO 6
TPL 0
TPP 0
TR 1
TRH 7
TRI 12
TRMK 10
TRN 6
TROW 20
TRV 22
TSH 2
TWGP 6
TXN 39
UBA 4
UBCP 0
UBSI 9
UBSI 9
UCBA 1
UDR 23
UFPI 4
UGI 3
UHT 2
UL 4
UMBF 3
UN 3
UNP 31
UNS 4
USB 29
UTX 23
UVV 1
VAL 12
VFC 18
VGR 0
VIVO 12
VLGEA 1
VLY 11
VMC 15
VMI 8
VSEC 3
VVC 7
VZ 37
WABC 9
WAG 20
WASH 3
WEC 17
WEYS 0
WFC 28
WFSL 14
WGL 7
WL 0
WLK 8
WM 8
WMB 10
WMT 31
WPC 1
WPZ 7
WR 12
WRB 13
WRE 9
WSBC 7
WSC 0
WSFS 5
WSH 16
WSM 25
WSO 11
WST 5
WTR 11
WWW 10
WWY 0
XEL 16
XLNX 27
XOM 22
XRAY 11
YORW 4
YUM 22
Click to enlarge

As a reader can see the range for number of analysts is from 0 (for 41 companies) to 49 (for Intel - INTC).

I think that a small dividend growth investor should pay more attention to 168 companies with 0-5 analysts than to big firms with 6-49 analysts. Of course, the "5 analysts" boundary is arbitrary because it is also important how closely the analysts follows the specific company. It should be noted also that capitalization of many companies with zero or moderate analysts coverage is not big enough to be considered by institutional investors. Some correlations between number of analysts and stocks parameters (taken from FinViz.com) are shown in the figure below:
Click to enlarge

Unfortunately Finviz doesn't provide data for BGH CPKF CSVI CZFS EFSI ENSI EPE FPU HNBC LCNB NRGP QNBC ROH TPP WSC WWY and I excluded these stocks from the picture. Also CCC list doubles info about 3 stocks (e.g. MO) and I excluded these duplications from the graph. As the results I got

Log (Market Cap) y = -0.0032x + 3.472 R^2 = 0.7719 Right Y axis
Log (Trade Volume) y = 0.1x + 4.3653 R^2 = 0.4805 Right Y axis
Log (Shares Outstanding) y = 0.0566x + 1.3439 R^2 = 0.4467 Left Y axis
Institutional Ownership % y = 0.0122x + 0.4895 R^2 = 0.1602 Left Y axis
Click to enlarge

i.e., correlation between number of analysts and market cap is quite strong and other parameters show also positive slope.

Therefore (to contribute in this WWW site title), I think that a small dividend growth investor can find so-called alpha in relatively unknown for Wall Street stocks. I should point that I didn't estimate risk (and for dividend growth investors the main risk, in my mind, is dividends cut), so the "alpha" here is a bit naive.
Nevertheless I think dividend growth investors should not ignore small cap companies. See also A Note About Smaller Risk Of Small Public Companies at
seekingalpha.com/instablog/725729-sds-se...