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Small-Caps And Dividends: A Potent Combination

|Includes: Exxon Mobil Corporation (XOM)

Stocks with the designation "small-cap" can get a bum wrap from investors, particularly dividend hunters. Many investors cringe at the very mention of the words small and cap as they apply to stocks. They get images in their heads of those crazy e-mails touting the next 10-cent oil company operating in the Bakken Shale that will put Exxon out of business or the ones about the 5-cent Canadian gold company that is sitting on more gold than there is in Fort Knox. Ninety-nine percent of the time, these stocks are duds, but the lesson is this: They are micro-caps, not small-caps.

A small-cap stock is defined as having a market value between $300 million to $2 billion. This is a range of market caps that most investors would consider to be chocked full of growth plays. When it comes to dividends, investors have a tendency to focus on large-cap names. At the very least, they look for dividend payers among stocks that are defined as mid-cap, or companies with market values above $2 billion and up to $10 billion.

Small-caps are typically viewed as riskier bets, suitable only for the growth part of an investor's portfolio. A common misconception is that growth and dividends often don't mix, so many investors ignore small-caps in their search for dividends. I can't be anymore blunt than to say this: Throw that notion out with yesterday's newspaper right now!

Here's one thing you absolutely need to know about small-cap stocks: On a historical basis, they outperform their large-cap rivals when the economy is making its way out of a recession. Put another way, we're in the best possible environment for savvy investors to start taking a nibble at small-caps. Of course if you can find small-cap stocks that also pay dividends and feature decent yields, then you'd really be onto something.

Now you might be thinking that I'm talking about a scenario that is too good to be true. Take it from me, it's not. You can in fact get the potential for rapid capital appreciation AND a reliable dividend in one tidy small-cap stock or through an ETF that tracks small-cap dividend payers. Best of all, it's not really that hard to find small-caps with great dividend yields. My research team recently screened the entire universe of stocks listed on the three major U.S. exchanges (AMEX, Nasdaq and NYSE) and discovered almost 300 securities that are defined as small-cap and have yields above 5%.

Strip-out the closed end funds and the list shrinks below 200 issues, but that still leaves us with plenty of choices. At this point, you may be saying to yourself "OK, Jim. Prove to me that small-caps and dividends together are worth my investment dollar." I'm glad you said that! In 2010, subscribers to both Dividend Genius and the ETF Profit Report have enjoyed the powerful combination of small-caps and dividends.

Dividend Genius - Smart Research on High-Yield Stocks

In the Dividend Genius Portfolio, we hold a stock that specializes in a sinful indulgence, but the returns this name has produced are blissful. The stock hit a new 52-week high on Wednesday and its recent torrid pace has carried it above the $1 billion mark in terms of market value, so it is still within the confines of the small-cap world.

We recommended this stock to our subscribers in our first issue of 2010. Since then it is up 35%, outperforming its large-cap rivals by three times all while delivering a yield above 8% during a time when the S&P 500 has been flat.

ETF Profit Report - An ETF Trading Service For Serious ETF Investors

Proving that ETFs are another way to play the small-cap/dividend trend, we have another winner in the ETF Profit Report portfolio. This ETF will actually get you exposure to best of all three worlds: Dividends, small-caps AND emerging markets. We've been in this position for a while and our patience is being rewarded. To my knowledge, my research team discovered this ETF long before other so-called experts did.

Well, the masses are starting to take note of this trade. The ETF is just pennies away from a fresh 52-week high and volume in the fund was nearly quadruple the daily average on Wednesday. The yield is 3%, better than what you'd get with a money market account, and the ETF is up 10% in the past month, outperforming the broader market along the way.

I know this strategy works because Dividend Genius subscribers are sitting on several other small-cap winners in addition to the one mentioned above. Sometimes, it's a good idea to break the mold of traditional dividend investing and think small. Small-cap that is.

Committed to your Global Profits,

Jim Trippon

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Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Jim Trippon, Kelley Damiani and J. Daryl Thompson.

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