The Top-Yielding Small-Cap Dividend Stocks in the Market

Everyone focuses on large-cap dividend stocks, but these smaller companies actually have better growth prospects and solid dividends. Find out about them here.

Jan 12, 2014 at 11:30AM

The S&P 500 (SNPINDEX:^GSPC) is an obvious place that many dividend investors use to find great prospects, as the index is full of hundreds of stocks that pay dividends. But because those stocks are so well-known, it's hard to get an investing edge over your rivals by focusing solely on large-cap stocks. For some newer ideas, let's look at the highest-yielding members of the S&P's SmallCap 600 index based on their actual payouts over the past 12 months according to S&P Capital IQ. Those small-cap dividend stocks include Prospect Capital (NASDAQ:PSEC), The Buckle (NYSE:BKE), Capstead Mortgage (NYSE:CMO), and National Presto Industries (NYSE:NPK).

Prospect Capital is a business-development company, taking advantage of tax benefits available to companies that invest in start-up and early stage businesses. Prospect has an 11.8% dividend yield as a result of its aggressive investments in the subprime consumer lending industry, with its attendant risk of regulatory scrutiny and its dependence on highly volatile collateralized debt obligations. But its recent entry into the real-estate market could give it some more diversification to support its dividend, although future interest rate increases from the Federal Reserve could make its cost of capital rise, potentially threatening some of its profits.

Retail company Buckle shows up on the list because of its $4.50-per-share special dividend in late 2012, which temporarily boosted its yield above 10%, according to S&P Capital IQ. Yet Buckle has a history of regularly making special payouts, including a $2.25-per-share payout in 2011 and a $2.50 special dividend in 2010. This year, Buckle is just going to pay $1.20 per share, giving it a roughly 4% yield going forward, but Buckle's steady growth plan has served it well in the volatile fashion industry.

Capstead Mortgage is a mortgage REIT, sporting a 10.1% yield. The company has done a better job than some of its peers in keeping its dividend up despite adverse conditions in the mortgage-backed securities market. The Federal Reserve's recent tapering of mortgage-security purchases could add further difficulties for Capstead and its peers, although a steepening yield curve could improve interest spreads and actually boost profits at least temporarily until short-term rates follow suit in moving higher.

National Presto is another company that relies on special dividends, with its $6.50-per-share dividend in late 2012, giving it its 8.2% yield according to S&P Capital IQ. The diversified company makes pressure cookers and other small kitchen appliances, ammunition and ordnance for military use, and adult incontinence products. With earnings having trended downward lately, it's unlikely that National Presto will match its 2012 dividend, but investors should still expect news about a payout in February.

Small companies with a big dividend punch
Small companies aren't all about high growth. Sometimes, the best small-cap stocks also have solid dividends. Don't ignore small caps as you search for the best dividend stocks for your portfolio.

Why dividend stocks get so much attention
One of the dirty secrets that few finance professionals will openly admit is that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends The Buckle and owns shares of National Presto Industries and The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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