Investing in small-cap stocks can be a rollercoaster ride, but when these lesser-known companies offer strong dividends, the potential rewards can be substantial. For investors seeking a predictable and recurring stream of passive income, Small Cap Stocks Offering Strong Dividends payments can be particularly attractive. This article delves into five small-cap stocks that have been largely overlooked by the market but offer compelling dividend yields. We’ll explore the benefits of dividend-paying firms, why these stocks are worth considering, and provide a detailed analysis of each stock, including a data table to illustrate their performance.
The Allure of Dividends: Predictable and Recurring Income
Dividends represent a tangible return on investment, providing a predictable and recurring stream of passive income. For many investors, the perception that dividend-paying firms tend to have a record of solid and stable free cash flow and responsible debt management makes these stocks less risky to hold, particularly during market downturns. Additionally, dividends can be reinvested immediately, allowing investors to benefit from the power of compounding—one of the most important wealth-driving concepts in all of finance.
As someone who has been fortunate enough to build some wealth over the years, I understand the allure of dividends. More importantly, these years have taught me that it doesn’t matter how your gains come. At the end of the day, cash is cash.
Let me illustrate with a simple example. Suppose you have two stocks you purchased for $10 each. Stock A climbs to $12 in a year for a gain of $2, while Stock B ends the same period at $10 for no gain but paid out $2 in dividends. Either way, your total return is the same at 20%.
This example highlights that cash, whether it comes from capital appreciation or dividends, represents tangible value. When dividends are paid out to shareholders, the value of the company and its shares may decrease by the same amount. However, a company that doesn’t pay dividends accumulates cash more quickly, which can then be reinvested to accelerate growth.
The Balance Between Dividends and Growth
In theory, the choice between paying dividends and reinvesting profits for growth suggests that one must come at the expense of the other. Companies that pay generous dividends often operate in mature industries with limited growth potential. In some cases, these companies may not have anything better to do with their excess cash than return it to shareholders. While the expectation for capital appreciation remains, the primary motivation for buying these stocks is the steady and predictable stream of income they provide.
Conversely, smaller firms with more favorable growth prospects might be better off reinvesting their excess cash to generate stronger sales and earnings, which could result in a higher stock price. However, there are instances where a stock can offer both—a steady dividend and the potential for capital appreciation. These opportunities usually arise when a steady dividend-payer already trading at a discount to the market suffers a sudden loss in share value due to overblown operational concerns or a softening in near-term prospects. In such cases, the stock may become significantly oversold and offer a compelling opportunity for both income-seeking and growth-oriented investors.
Criteria for Safe Dividends and Potential for Value Realization
To identify small-cap stocks with strong dividends that also offer potential for capital appreciation, two key factors must be considered. First, there must be sufficient evidence to indicate that the dividend payments are safe and will even grow over time. Second, there needs to be evidence that the shares of these firms will be able to realize great value sooner rather than later.
Below, we highlight five small-cap stocks that meet these criteria. Each of these companies offers a strong dividend yield, has demonstrated financial stability, and presents potential for future growth.
1. Fresh Del Monte Produce (FDP)
Who They Are: Fresh Del Monte Produce is a global leader in the production, distribution, and marketing of fresh and fresh-cut fruits and vegetables. The company also offers value-added products such as prepared fruit and vegetables, juices, beverages, and snacks. Based in Coral Gables, Florida, FDP had sales of $4.3 billion last year and has a market value of $1.2 billion. The company serves customers across North America, Europe, Asia, the Middle East, and Africa.
Why The Stock Could Fly: Despite a challenging 2023, FDP has made significant operational progress, including asset optimization and improved financial health. The company’s free cash flow surged to $120.3 million in 2023, allowing it to reduce net debt and increase its dividend payout. With a strong gross margin and continued focus on profitable growth, FDP is well-positioned for a better year in 2024.
What Makes The Dividend Safe: FDP has paid a steady quarterly dividend since 2002, which has steadily increased over time. The latest dividend increase to 25 cents per share reflects the company’s confidence in its ability to generate strong free cash flow.
2. Information Services Group (III)
Who They Are: Information Services Group (III) is a technology research and advisory firm based in Stamford, Connecticut. The company provides services in areas such as automation, cloud and data analytics, sourcing advisory, managed governance, and risk services. III has 1,500 employees and serves about 900 clients globally.
Why The Stock Could Fly: III’s stock has faced challenges due to economic uncertainty and delayed spending by clients. However, the company’s focus on incorporating generative AI into its services and the launch of new platforms like ISG Tango present significant growth opportunities. With the potential for improved profitability and margin expansion, III’s stock could see a rebound.
What Makes The Dividend Safe: III has consistently raised its quarterly dividend since 2021, reflecting its confidence in producing strong free cash flow. Despite recent challenges, the company is well-positioned to continue funding its dividend payments.
3. ACCO Brands (ACCO)
Who They Are: ACCO Brands is a provider of school supplies, office products, and accessories for personal computers and video-game systems. The company, based in Lake Zurich, Illinois, has a market capitalization of just under $500 million and generated $1.8 billion in revenue in 2023.
Why The Stock Could Fly: ACCO has delivered solid free cash flow and improved profitability despite a challenging macroeconomic environment. The company’s restructuring efforts and focus on cost reduction are expected to further enhance profitability. With a strong cash flow and manageable debt levels, ACCO’s stock offers significant upside potential.
What Makes The Dividend Safe: ACCO has been able to maintain and even raise its dividend payments despite the challenging operating environment. The company’s strong free cash flow and reduced debt levels support the sustainability of its dividend.
4. SpartanNash (SPTN)
Who They Are: SpartanNash is a food solutions company based in Grand Rapids, Michigan. The company operates 144 supermarkets and supplies food products to independent grocery store operators and military commissaries. SPTN had revenues of $9.7 billion in 2023 and a market capitalization of around $650 million.
Why The Stock Could Fly: SPTN’s stock has been under pressure, but the company’s strong cash flow and cost-cutting initiatives present an opportunity for a rebound. With plans to improve profitability and expand its AI and supply-chain capabilities, SPTN is well-positioned for future growth.
What Makes The Dividend Safe: SPTN has a long history of paying dividends, which have steadily increased over time. The company’s stable cash flows from its non-cyclical business provide a solid foundation for continued dividend payments.
5. Ituran Location and Control (ITRN)
Who They Are: Ituran Location and Control is an Israel-based company that provides vehicle-tracking services. The company also offers fleet management, connected car, and usage-based insurance applications. ITRN generated $320 million in revenue in 2023 and has a market capitalization of about $530 million.
Why The Stock Could Fly: ITRN has shown strong financial performance despite challenges such as the war in Israel and currency devaluation in Argentina. With continued subscriber growth and a strong balance sheet, ITRN is poised for further gains. The company’s increasing dividend payments also reflect confidence in its future prospects.
What Makes The Dividend Safe: ITRN has significantly increased its dividend payouts in recent quarters, supported by strong free cash flow and a robust cash position. The company’s ability to generate cash and its confidence in future growth suggest that further dividend increases are likely.
Investing in small-cap stocks with strong dividends offers the potential for both steady income and capital appreciation. The five stocks highlighted in this article—Fresh Del Monte Produce (FDP), Information Services Group (III), ACCO Brands (ACCO), SpartanNash (SPTN), and Ituran Location and Control (ITRN)—represent compelling opportunities for investors seeking to build wealth through a combination of dividends and growth. Each of these companies has demonstrated financial stability, a commitment to returning value to shareholders, and the potential for future appreciation.
While small-cap stocks can be volatile, the dividend yields offered by these companies provide a cushion against market fluctuations. For investors willing to take a closer look at these unloved gems, the rewards could be substantial.
Performance of Small-Cap Stocks with Strong Dividends
| Stock Symbol | Company Name | Dividend Yield (%) | Market Cap (Millions) | Revenue 2023 (Millions) | Free Cash Flow 2023 (Millions) | Net Debt (Millions) | Dividend Growth (2023) | P/E Ratio (2024) |
|---|---|---|---|---|---|---|---|---|
| FDP | Fresh Del Monte Produce | 4.0 | $1,200 | $4,300 | $120.3 | $373.7 | 25% | 11 |
| III | Information Services Group | 4.5 | $291 | $291 | N/A | N/A | 50% | N/A |
| ACCO | ACCO Brands | 7.5 | $500 | $1,800 | $117.5 | N/A | N/A | N/A |
| SPTN | SpartanNash | 21.75 | $650 | $9,700 | N/A | N/A | N/A | N/A |
| ITRN | Ituran Location and Control | 40.0 | $530 | $320 | $17.7 | N/A | 167% | 11 |
*Note: N/A indicates data not available or not applicable.
This comprehensive analysis should serve as a valuable guide for investors seeking to uncover hidden opportunities in the small-cap dividend-paying space. By focusing on these undervalued stocks, investors can position themselves to benefit from both income and potential capital gains, making them attractive additions to a diversified portfolio.
