The Best Undercover Dividends

Like the Incredible Hulk, dividends are a force to be reckoned with.

If you ask me, there is no better way to quickly determine the overall attractiveness of a stock than by checking out its dividend. Dividends can give you a sense of whether a company is really making money, whether its stock is reasonably valued, and how management views shareholders. All in all, it's a pretty mighty number.

And while most investors are very familiar with dividend royalty like AT&T (NYSE:T) and Chevron (NYSE:CVX), there are plenty of good dividend-paying companies that are small enough to fly under Wall Street's radar. And many of these undercover dividend payers offer higher dividend payouts, better growth, or both.

To uncover some of these small dividend dynamos, I turned to the Motley Fool CAPS community, looking specifically for companies with a market cap below $5 billion and a dividend yield above 2.5%.

Source: CAPS and Yahoo! Finance.

While the stocks above are all definitely small and dividend-paying, it's apparent by their star ratings that the CAPS community doesn't think they're all worth your investment dollars. They could all be worth researching further, though, and to get you started, let's take a closer look at Motley Fool Stock Advisor pick Pharmaceutical Product Development.

The business
Whether you're a massive drug company like Pfizer (NYSE:PFE) or Merck (NYSE:MRK), or a little biotech start-up, the time, cost, and effort of getting a new drug approved can be daunting.

But drug companies don't have to go through the process alone. Clinical research organizations (CROs) like Pharmaceutical Product Development specialize in helping drug companies navigate this winding road, in areas like drug development, running and managing clinical studies, and dealing with regulatory issues.

PPD has a global presence, with offices in 40 countries. Recently, though, the company has been very focused on the big opportunities it sees in the Chinese market and has made multiple acquisitions to help it gain a bigger foothold there.

The dividend
While past performance isn't always indicative of future results, well-schooled dividend investors typically prefer companies that have a decent history of keeping up payments. Though PPD's recent dividend performance has been admirable (per-share payout has nearly tripled since 2007), the company has only been paying a dividend since 2005.

But if we can let PPD slide on dividend history, the rest of the story looks promising. To date, the company's payout ratio has been kept relatively low, at 35%, which provides security and gives the company extra room to raise the dividend in the future. Meanwhile, the company's balance sheet is a thing of beauty, with nearly $600 million in cash and no debt.

And when we turn to my favorite of the financial statements -- the cash flow statement -- the story only gets better. PPD churns out extremely healthy sums of cash and has a relatively small amount of capital spending needs. For the 12 months ended last September, for instance, the company brought in $259 million in cash from operations and spent only $51 million on capital expenditures, leaving more than enough to cover the $65 million in dividends it paid out.

CAPS members sound off
A total of 679 CAPS members have shared their opinion of PPD, and 672 of them think the stock is set to outperform the rest of the market. Among those PPD bulls is CAPS All-Star greenwave3, who gave the stock a thumbs-up midway through last year and had this to say:

Growth, cash on hand, no debt, and a multi-billion $backlog. Big pharma will need players like [PPD] to help refill their expiring line of drugs. Looks cheap for a company with such potential.

Your turn
Think these dividend payers have what it takes to be top-notch investments? Head over to CAPS and share your thoughts on the prospects for Pharmaceutical Product Development or any of the other companies listed above.

Pharmaceutical Product Development may be a good investment opportunity, but my fellow Fool Tim Hanson believes he's found the biggest investment opportunity of the year.