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Dividend Investing: This Small-Cap Stock Is Good For DRIP

|Includes: PetMed Express, Inc. (PETS)

It's been a while since the last article in the dividend investing series, but we're back with this series and hope to make it more frequent. In this edition, we'll examine a small-cap dividend stock that you can consider for a dividend reinvestment plan, or DRIP for short.

Before we discuss the company in question, let's talk about DRIP. DRIP is a good way to grow your position in a company without investing additional dollars. All you need do is reinvest the dividends you receive back into the company. In addition, you can view DRIP as a way of investing for both income and capital gains, especially when the companies involved have great business models. This strategy can be more effective with great small-cap companies, since they have more growth opportunities. With that said, I present to you the small-cap stock for this edition.

PetMed Express, Inc. (NASDAQ: PETS)

PetMed operates as a pet pharmacy in the U.S. Most pet lovers already know that households in the U.S. have more pets than kids. According to figures from the American Pet Products Association, American pet industry expenditures grew over 29 percent between 2007 and 2012. Moreover, pet expenditures in 2013 were projected to be in the region of $55 million. All of this is simply to show you that there is a future in this industry for PetMed, which makes it a good DRIP option.

PetMed first paid dividends out to investors in August 2009 and since then there hasn't been one quarter where it missed dividend payments. It currently pays an annualized dividend of 68 cents. Impressively, the company has increased its dividend payout by a whopping 70 percent since its first payout. This gives a bit of assurance that the company is committed to making investors happy, which is always a good sign for long-term income investing success.

One thing that further gives assurance from a financial standpoint, is that the company has no debt on its books, which means that shareholders can fully benefit from the company's income. However, one concern is that the company's free cash flow payout ratio is high at the moment. But on looking through its free cash flow history, one will find that there have been more periods when its free cash flow supported dividend payment than periods when it doesn't. Moreover, with the impending growth that will come upon the pet industry, coupled with the fact that this company has a great business model, I expect this currently unfavorable situation to even out with time.

Bottom line

As I stated above, DRIP represents a good way to invest for both capital gains and income with great companies. Here is how things should play out for PetMed. As the company expands along with the industry, its market value should also benefit. By the time its stock starts benefiting, the dividends you reinvested will bring in additional value. However, it's important to note that this company doesn't have a reinvestment plan of its own. You will need to look for a broker that offers synthetic reinvestment programs to enroll in DRIP for this stock. From all that's been said, this should be a worthwhile venture.