Income-hungry investors have taken it on the chin for years. With the Federal Reserve's low interest rate policy, bond yields have fallen further than nearly anyone expected. And after last week's big European scare, rates fell to their lowest levels on record, with 10-year yields dropping below 1.5% before rebounding a bit in recent days.
As several of my fellow Fools have already pointed out, low bond yields make dividend-paying stocks look a lot more attractive. For a while now, the S&P 500's dividend yield has exceeded the yield on the 10-year Treasury. But lately, rates have gotten so low that even small-cap stocks briefly joined their larger counterparts by having dividend yields exceeding what you could get from a 10-year Treasury note.
This doesn't happen every day
Small-cap stocks aren't exactly known for their high dividend yields. In contrast to bigger, more mature companies that have better-established business models and tend to generate more free cash flow, small-cap companies typically have to retain as much as they can in order to grow their businesses and invest in new money-making opportunities. Many small-cap stocks pay no dividends at all, while many others make only token payments to get on the radar screens of income-seeking investors.
As a result, the current situation is extremely rare. As Barron's pointed out earlier this week, the only times this has happened in the past couple of decades were during the financial crisis -- when the market was plumbing ever-lower depths in preparation for one of the biggest moves higher in stock market history -- and last September, right before stocks went on an amazing six-month bull run.
In situations like this, what's worked well in the past is simply to buy a basket of small-cap stocks. Because these conditions tend to occur when stock prices are low and bond prices are inordinately high, simple reversion to the mean produces some pretty strong returns even for the broadest small-cap ETFs.
Finding big yields from small companies
But another way you can try to take advantage of low bond yields is to seek out small-cap stocks that have inordinately high yields. With high-yielding stocks, you don't even need share prices to rise at all in order to capture a decent return.
Unfortunately, many high-yielding small caps come with substantial risks. For instance, SUPERVALU
Other small caps are more mature than their size may suggest. EarthLink
Finally, you can sometimes find companies somewhere between their growth phase and the more mature part of their lifespan. True Religion's
Look closely at stocks of all sizes
Accepting 1.5% for the next 10 years simply doesn't make much sense, now or ever. With a wide variety of small-cap stocks paying well in excess of 1.5%, you owe it to yourself to take a closer look at investments that can actually make you money over the long haul.
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Fool contributor Dan Caplinger loves big potential in small packages. He doesn't own shares of the companies mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of SUPERVALU and Seaspan. Motley Fool newsletter services have recommended buying calls on SUPERVALU and creating a covered straddle position in Seaspan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is just the right size.