3 Small-Cap Stocks That Pay Big-Time Yields

James Brumley

When investors seek-out high-yield stocks, most of them end up finding high-profile large-cap names.

I'm talking about companies like natural gas middleman SandRidge Mississippian Trust (SDT), with its current payout rate of 17.3%, or a mortgage real estate investment trust (REIT) company such Capstead Mortgage (NYSE: CMO), which currently boasts a 10% yield. Even a more conventional equity like Dow component AT&T (NYSE: T), with its 5% yield, is sought by many investors for its reliable cash payout.

However, there's a downside to owning large-cap stocks that were built largely on the premise of paying dividends: There's little opportunity for major growth in the dividend. There's also scant opportunity for significant appreciation in the share price.

Income investors looking for overall growth that has a shot at outpacing inflation may want to consider these small caps, which have room to grow but still offer solid (and reliable) dividend yields.

OneBeacon Insurance Group
With a trailing dividend yield of 5.9%, it's not like OneBeacon Insurance Group (OB) is knocking the socks off bigger dividend payers. Throw in the fact that the stock's regular quarterly dividend hasn't budged from 21 cents a share since the insurance company began paying it in 2007 (after its 2006 IPO), and the company becomes even less impressive. Still, the yield beats the market average of 2.4%.

There's a little detail, however, that more than makes up for OneBeacon's stalled regular dividend payout. Sometimes, OneBeacon pays a whopper of a special dividend.

In 2010, the special dividend reached $2.71, translating to an effective yield of 24%. In 2011, the special dividend of $1.21 meant a yield of about 16%. That's huge.

OneBeacon didn't pay a big one-time dividend in 2012, largely because it's been shrinking by divesting some of its businesses. As the divestitures stabilize, odds are good the company will resume the special payouts. Analysts expect OneBeacon to turn 2012's loss of 59 cents a share around to a profit of $1.07 a share in 2013 and $1.13 in 2014. That leaves plenty of room to distribute more to shareholders.

At $4.76 billion, Windstream (WIN) isn't technically a small cap, but the telecommunications company is hardly a household name. Either way, its current dividend yield of 12.5% is attractive enough to merit a closer look.

That being said, the frothy dividend yield has been subject to much debate of late. Some investors don't think it can be maintained, given the company's recent and planned capital expenditures. They need not worry. Windstream has said it's going to reduce its capital expenditures from 2012's $1.1 billion to less than $850 million this year.

Meanwhile, although Windstream continues to bleed voice-related revenue, the company is more than offsetting that with data-driven revenue. Although analysts are still expecting a mild dip in revenue this year and flat revenue growth for 2014, those outlooks don't respect the fact that Windstream has finally started to figure out its optimal collection of video, voice and data services.

Donegal Group
If Windstream is under the radar and OneBeacon Insurance is obscure, then insurer Donegal Group (DGICA) is an outright unknown. But that doesn't make it any less compelling.

Donegal shares currently boast a dividend yield of 3.4%. It's better than the market average, but investors can certainly find stronger payers. So what makes Donegal attractive?

One reason is the company's long history of rising quarterly dividends, from 6 cents a share in the middle of 2003 to 13 cents a share last quarter. The increase in the payout simply reflects growth in Donegal's revenue and earnings -- even if that growth has been erratic at times.

However, there's an X factor now working in favor of Donegal shares: a potential bidding war. Institutional-level private investor Gregory Mark Shepard has offered $30 per Class B share for enough shares to give him control of nearly 23% of the company. That was a 42% premium over the pre-offer price. The board of directors, however, advised shareholders to not take the offer.

Although it's unlikely Shepard will increase his offer, it's not off the table, either. Even if he doesn't counter with more than $30 per share, he's long argued that the company's B shares -- and by extension, its A shares -- "trade at a substantial discount to their realizable value if combined with another mutual insurer." He's also clamored "to explore strategic alternatives to maximize shareholder value." If Shepard sees something untapped about the company, one way or another, it will eventually come to the surface.

Risks to consider: Some investors will have noticed that shares of many of the market's favorite dividend payers have suffered of late, due in part to the rising yields on the 10-year Treasury note. Dividend stocks are highly rate-sensitive. Though it's unlikely bond yields have room to move much higher anytime soon, anything's possible.

Action to take --> First and foremost, investors may want to consider whether a particular industry is overrepresented or underrepresented in their current portfolio before entering any of these names. If that's not an issue with your particular portfolio, however, then Donegal may be the top choice among the three. Though it has a trailing yield of only 3.4%, it's the best positioned of the three to beef up its bottom line and increase its payout rate in the foreseeable future.

Related Articles

  • BAC

    Trader bets $1.2 million on Bank of America – and could make a 633 percent profit

    Bank of America's summer surge has some traders betting on further upside for the stock. The trade was made when Bank of America (BAC) was trading at around $15.90, and it has a break-even level of $16.12. If the stock closes below $16 on Friday, the entire $1.2 million spent in options premium will be lost.

  • Business

    My Eight Tips for Surviving Life as an Office Monkey, And Only One of Them Involves Alcohol

    Because desk jobs can suck major wang, but they don't have to!Any of you who say you've never read xoJane at work are lying. Unless you're an astronaut, I guess? Does the internet work in space?Hi, my name is Rabbit, and I'm not going to talk about fat

  • Lifestyle

    We officially know when Tower of Terror is closing at Disneyland, so start saying goodbye

    Write this down: The last time you’ll be able to *drop* in on Tower of Terror at Disneyland is January 2nd, 2017. Since all good (and terrifying) things must come to an end eventually, earlier today the Disney Parks Blog made the official Tower of Terror announcement. To prepare for the brand new Guardians of the Galaxy ride that will take the place of the 13-story drop, Tower of Terror will no longer be accepting new hotel guests after the start of next year.

    Hello Giggles
  • Entertainment

    Peyton Manning Took A Shot At Tom Brady During Rob Lowe's Comedy Central Roast

    Retirement hasn't taken the fight out of Peyton Manning. If you had told me you’d be at Rob Lowe’s Comedy Central roast — which airs Labor Day — doing Tom Brady jokes, I would have helped you out free of charge.

  • Politics

    An entrepreneur from Mexico tells Donald Trump: Drop from the race

    An entrepreneur that travels between Mexico and the U.S. could be in big trouble if republican presidential candidate Donald Trump wins

    Yahoo Finance Video
  • Business

    Here are the 3 reasons gold isn't $2,000 an ounce

    Gold has surged in 2016 against a backdrop of political uncertainty and consistently low interest rates, but it has not broken past its 2011 high. Gold is up 24% year-to-date, a performance bettered in the past 12 years only in 2011 at the height of the eurozone sovereign-debt crisis. Gold is a popular asset in 2016.

    Business Insider UK
  • Business

    4 Numbers That Help You Plan for a Secure Retirement

    Two-thirds of 401(k) participants polled for a recent J.P. Morgan Asset Management report said they could better plan for retirement if their employers helped them “understand their numbers”—that is, get a handle on such specifics as how much they should be saving and how much money they should have in retirement accounts to ensure a secure post-career life. Here are four key numbers that can make retirement planning less daunting and at the very least get you going in the right direction until you come up with a more customized plan. Indeed, this report from the Boston College Center for Retirement Research estimates that’s how much the typical U.S. household should save each year in order to maintain its pre-retirement living standard in retirement.

  • Business

    Joe Sutter, father of the 747, passes away at 95

    In addition to the 747, Sutter worked on projects including the 737 and 707 aircraft models, Boeing Commercial Airplanes chief executive officer Ray Conner said in a message to employees. Sutter and his team became known as "the Incredibles," for producing the world's largest airplane within 29 months from the time of conception. Sutter served the company as a consultant after his retirement from the company in 1986.

  • World

    Comey: FBI wants 'adult conversation' on device encryption

    FBI Director James Comey warned again Tuesday about the bureau's inability to access digital devices because of encryption and said investigators were collecting information about the challenge in preparation for an "adult conversation" next year. Widespread encryption built into smartphones is "making more and more of the room that we are charged to investigate dark," Comey said in a cybersecurity symposium. The remarks reiterated points that Comey has made repeatedly in the last two years, before Congress and in other settings, about the growing collision between electronic privacy and national security.

    Associated Press
  • Business

    5 Things That Aren’t Worth Going Into Debt For

    When you’re paying off debt — and the interest that comes with it — you’re giving someone else money that you could be saving. In other words, debt payments are money you’re not investing in your future.

  • Business

    Gilead sinking stock price calls out for new rescue plan

    There was a time when the underperformance of Gilead Sciences' (GILD) stock price was viewed as an opportunity to buy shares of a historically great biotech company at a discount. But Gilead's stock price continues to fall, trading today where it did two years ago. The value play looks more like a trap. Investors once okay with waiting patiently for a Gilead rebound are growing frustrated, even angry, at the company's lack of progress. (I wrote about the challenges to Gilead's M&A growth strategy in July.) It's reaching the point now where Gilead CEO John Milligan (and before him, John Martin) is at risk of losing his perennial status as biotech's best, most trusted CEO. "Investors have broadly

    The Street
  • Business

    Wells Fargo: Buy Now…Or Forever Hold Your Peace

    As part of KBW’s ongoing August Opportunity series, we are highlighting Outperform-rated Wells Fargo as an investment that we believe investors should be increasing while the opportunity still presents itself. Wells Fargo has been the worst-performing Universal Bank stock this year but we are maintaining the stock as our Best Idea, and at the current valuation we believe that shares of Wells Fargo are cheap relative to peers and investors should be adding shares to portfolios. Shares of Wells Fargo have lagged peers year to date, and Wells is now the worst-performing Universal Bank stock this year. The end result is that Wells Fargo is now trading at 11.6x our 2017 EPS estimate and this is 71% of the market multiple.

  • Business

    Chipotle hopes these freebies will get customers to bite

    Chipotle Mexican Grill is working hard to win back customers of all ages. The burrito chain said Tuesday that it will offer two new promotions during the month of September, one for college students and another for families. That's on top of the chain's limited-time Chiptopia loyalty program, which dishes out free entrees after a set number of purchases. The string of promotions come as the casual dining chain tries to boost sluggish sales and foot traffic in its restaurants, which have yet to recover from a series of high-profile foodborne illness outbreaks last year. Chipotle's same-store sales plunged nearly 30 percent in the first quarter, when it reported its first quarterly loss as a public

  • Business

    What Donald Trump's Tax Returns Won't Tell Us, But Hillary Clinton's Do

    Voters would like to poke through Donald Trump’s tax returns, but they can’t. After some earlier waffling and mixed signals, Trump’s camp now seems firm that his big tax audit prevents him from releasing his returns. Outside of a Presidential campaign, his audit defense is a pretty good one, whatever the IRS or the public might say. A letter from Trump’s tax lawyers confirmed there was an ongoing tax audit for 2009 and later. Anyone who has ever been through a tax audit might have some sympathy.  Still, many voters aren’t likely to give him a free pass. As a candidate for President, the conventional answer is that Trump should release them, even though there is no legal requirement. Trump says

  • Business

    ‘Rich Dad’ author Robert Kiyosaki: If you’re investing for the long term, ‘you’re crazy’

    Robert Kiyosaki, author of several best-selling books including “Rich Dad Poor Dad,” joined MarketWatch for a live interview on Facebook today. He offered up insights on making money, becoming an entrepreneur and even touched on politics. Here are some highlights from the talk, or you can listen to the full interview here. His advice on how to get rich: “The rich do not work for money. Most people do not understand that, because they’re taught to go to school and get a job for money. The rich don’t work for money. Check out: Get ready for a 5%-10% stock-market drop And one of the reasons for that is money is no longer money. One of the reasons for that is in 1971, President Nixon took the U.S.

  • Business

    Bill Gross: The Fed has mastered market manipulation

    The Federal Reserve, with its bargain-basement interest rates and money printer always on standby, is manipulating financial markets and crushing capitalism, bond king Bill Gross said in his latest broadside against the U.S. central bank. The criticisms come as the Fed is weighing whether to raise interest rates after years of keeping them anchored in efforts to stimulate the economy and create inflation. Instead, Gross said, the Fed has merely inflated asset prices while actually harming the economy.

  • Business

    What Happens to Your Credit Score When You Buy a House?

    If you've just bought a new home, chances are you spent quite some time worrying about your credit score. After all, your credit score affects your ability to get a mortgage, and the interest rate you'll pay on that mortgage. You'll likely start seeing minor dings in your credit score as soon as you begin applying for mortgages.

  • Politics

    Trump flies to Mexico and JetBlue flies to Cuba

    Donald Trump wants to talk with Mexico's President just hours before the Republican candidate gives a major address on immigration in Arizona. And flying to Cuba just got a lot easier and cheaper for Americans.

    Yahoo Finance Video

    Google's Diane Greene is on the verge of scoring a huge I-told-you-so

    It's fashionable in certain tech circles these days to diss Google's cloud efforts as being too little too late, while Amazon soars ahead, and Microsoft nips at its heels. Over the last year, she has revamped the company's cloud organization so that it can get invited to the table when corporations choose a cloud provider. And to make sure Google has the stuff to win the deals.

    Business Insider
  • Business

    Icahn: Ackman is backed into a corner on Herbalife

    Billionaire investor Carl Icahn rejected any assertion Tuesday that he is backed into a corner on troubled nutritional supplement company Herbalife. In fact, he said it's his long-time rival, Bill Ackman, who has the far more tenuous position. "If anyone should feel boxed in, it's Ackman," Icahn said in an exclusive interview with CNBC.com. "Ackman is an astute student of the market, as I am, and I think he would probably agree that there is very rarely, if ever, a company with the short interest, as it was just announced of 27.2 million shares of the 92 million shares outstanding. Of the 92 million, there are 20 percent to 25 percent that are closely held." "The only time you see the ratio very

  • Politics

    White House names members of Puerto Rico control board

    The White House on Wednesday announced the members of a new oversight board to help manage Puerto Rico's debt-stricken economy, with President Barack Obama expressing confidence that the panel can turn around a dire financial situation. Legislation passed in June set up the control board and required the White House to choose from a list recommended by Republican and Democratic congressional leaders by September. Similar to a board that oversaw the District of Columbia in the late 1990s, the panel's seven members will oversee negotiations with creditors and the courts over reducing some of Puerto Rico's roughly $70 billion debt.

    Associated Press
  • Entertainment

    Arya actress: It'd be cool to kill off this character on 'Game of Thrones'

    Look out, Cersei Lannister. You may be on the Iron Throne for now, but Arya of House Stark is gunning for you. Maisie Williams, who plays Arya, recently made news when she tweeted "nothing will prepare" fans for the show's next season. She's speaking out again. Williams spoke with Variety about her role, and she has her sights set high. When asked who she'd like Arya to interact with next season, newly crowned Queen Cersei and creepy priestess Melisandre topped the charts. (Remember, Arya's keeping a mental list of people she needs to murder to get her revenge.) "To cross another big name off the list -- but then I feel like people might come for me, because although everyone doesn't like Cersei,

  • Politics

    Africa's biggest economy officially enters recession

    Africa's biggest economy is officially in recession. Nigeria released data on Wednesday showing its gross domestic product declined by 2.06 percent in the second quarter of the year. It is the West African country's first recession since 1991, according to Central Bank data.

    Associated Press
  • Business

    FIFA reveals Infantino's 1.5m Swiss franc salary

    FIFA president Gianni Infantino's salary has been fixed at 1.5 million Swiss francs a year (1.38 million euros, $1.5 million), world football's governing body revealed on Wednesday. "Given the earlier misunderstandings and misrepresentations concerning this process and my compensation, I am pleased that this matter is now resolved and that I have a signed, valid employment contract," said Infantino, referring to previous rumours that his salary would be higher. FIFA's secretary general Fatma Samoura, the first woman to hold that post, will earn 1.3 million Swiss francs with bonuses of a car and the same monthly expenses as Infantino.

  • News

    Japanese airline ANA to replace 100 Rolls engines on 787s

    ANA Holdings Inc , Japan's largest airline, said on Wednesday it will replace all 100 Rolls-Royce engines on its fleet of Boeing (BA.N) 787 Dreamliners following three engine failures this year caused by corrosion and cracking of turbine blades. In response to questions from Reuters, ANA, the world's largest 787 operator, said all 50 of its 787s will receive engines fitted with new blades, a process that could take up to three years.