Worried about a stock market correction over the coming months? You may want to consider dividend stocks to offer your portfolio some protection.

Studies continue to show that the best way to mitigate against broad market losses is investing in dividend stocks. A University of Chicago study on the relationship between dividends and earnings found that the fraction of losses reported by non-dividend payers in the U.S. grew from 28% in 1974-1979 to 52% by 2000-2005.

Dividend payers followed the same general trend of increasing fraction of losses reported, but in a far lower percentage than non-dividend payers, with losses compromising of 3.5% of dividend payers in 1974-1979 to 11% in 2000-2005 (but this percentage of losses has been more or less consistent since 1985-1989).

In other words, the study suggests that dividend-paying stocks are less likely to report losses, which may protect their investors during economic downturns.

But for all the advantages, dividend investing can be frustrating if you're looking for sizable gains. This is largely because investors tend to gravitate toward large, blue-chip stocks offering safety, but not much in the way of capital gains.

An alternative is to look for quality small-cap dividend stocks, which offer greater potential for large capital gains. The dividend payments reduce your risk, but the capital gain rewards can be major -- the best of both possible worlds in this day and age.

If you're looking for dividend stocks to add to your portfolio, consider small-cap stocks that have good coverage ratios. To help you get started, we've crunched the numbers for you.

We started with a universe of about 80 dividend paying small-cap stocks that have seen significant insider buying over the last six months. We then looked at each company's cashflows, and identified the small-cap names that have the largest cash holdings relative to dividend payouts (i.e., good dividend "coverage" ratios).

Insiders think these small-cap dividend stocks offer great potential -- do you agree? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Duff & Phelps (NYSE: DUF): Asset Management Industry. Market cap of $588.52M, with a dividend yield at 2.3%. Over the last six months, insiders have been net buyers of 5,300 shares, which represents about 0.02% of the company's float of 30.36M shares.

Trailing 12 month (TTM) operating cashflow at $43.94M, which translates into $1.4 operating cashflow per common share vs. annual dividend per share at $0.32, which means the (operating cashflow per share / annual dividend per share) ratio stands at 4.37.

TTM levered free cashflow at $13.79M, which translates into $0.44 levered free cashflow per common share vs. annual dividend per share at $0.32, which means the (levered free cashflow per share / annual dividend per share) ratio stands at 1.37.

2. PH Glatfelter (NYSE: GLT): Paper & Paper Products Industry. Market cap of $682.31M, with a dividend yield at 2.5%. Over the last six months, insiders have been net buyers of 31,000 shares, which represents about 0.07% of the company's float of 45.56M shares.

Trailing 12 month (TTM) operating cashflow at $175.25M, which translates into $3.81 operating cashflow per common share vs. annual dividend per share at $0.36, which means the (operating cashflow per share / annual dividend per share) ratio stands at 10.57.

TTM levered free cashflow at $105.65M, which translates into $2.29 levered free cashflow per common share vs. annual dividend per share at $0.36, which means the (levered free cashflow per share / annual dividend per share) ratio stands at 6.37.

3. Lincoln Educational Services (Nasdaq: LINC): Education & Training Services Industry. Market cap of $330.57M, with a dividend yield at 6.8%. Over the last six months, insiders have been net buyers of 291,384 shares, which represents about 1.38% of the company's float of 21.18M shares.

Trailing 12 month (TTM) operating cashflow at $108.35M, which translates into $4.8 operating cashflow per common share vs. annual dividend per share at $1, which means the (operating cashflow per share / annual dividend per share) ratio stands at 4.8.

TTM levered free cashflow at $76.59M, which translates into $3.39 levered free cashflow per common share vs. annual dividend per share at $1, which means the (levered free cashflow per share / annual dividend per share) ratio stands at 3.39.

*Dividend data, levered free cash-flow and operating cash-flow data sourced from Yahoo Finance, common share values sourced from Google Finance. Data sourced on Friday afternoon, May 27.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.

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