Income investors look at many factors as they build their portfolios.  I encourage a disciplined, systematic approach.    As you know I use four criteria to screen for stocks to buy for income. 

Periodically, I evaluate my results and today’s post evaluates a microcap stock that I profiled in 2011 as a dividend machine.

Does Market Capitalization Matter?

This questions comes up all the time.   You will find expert investors who encourage small capitalization stocks at various times.   They will tell you these stocks do better than the big boys.   

What is a small cap stock?  What is a microcap stock?    Investopedia defines small cap. stocks as those with a market capitalization of between $300 million and $2 billion. Microcap stocks are less than $300 million.   By the way, to determine a stocks’ capitalization multiply the number of outstanding shares by the share price. 

Perils & Advantages of Microcap Stocks:

The factors that affect small companies include the fact that they tend to be thinly traded; they do not get attention from big Wall Street Investors; their revenues and sales may be linked to very few customers.    

These factors suggest that if you really need to sell a company that is thinly traded you may not get the price you need.    Because big investors like mutual funds have limits on how much an individual stock they are allowed to own, you do not get the advantage of the price increases related to mutual fund activity.   The loss of just one customer can ruin a small company.

However, history shows that smaller cap companies have better growth rates year over year:  Ibbotson reports small caps increase by 12% versus 10% for the big boys.  Moreover, these companies can operate under the radar and you can get a disconnect between stock price and company fundamentals providing an investment opportunity.

Microcap stocks tend to be associated with the phrase “penny stocks.”   Traded on the Bulletin Board or Pink Sheets, these stocks are usually stocks for trading.  I do not buy these stocks.  The only small or microcap stocks I buy are those that provide income.

The stock I am going to write about today is a microcap that has excellent fundamentals and an excellent history.

Espey Manufacturing & Electronics (ESP)

This company is a dividend machine.   It has been in business since 1928.  They are an original equipment manufacturer of very precise components for military and severe environmental applications. The market capitalization is a mere $77 million. 

ESP dividend machine fundamentals

The table at left presents ESP’s dividend fundamentals including their earnings per share, dividend, yield, number of years of dividend increases and debt to equity ratio.

ESP’s stock price history is interesting.   If you go back to before the financial crisis of 2009, ESP traded around $18.   The price suffered during the crises and retreated to $13.31 in March of 2009.   

 Since then, the stock price has clawed its way back to more than double to close at $33.08 on November 19, 2013.  When I profiled this stock in 2011 the price was $26.00 per share.

ESP Dividend History

The reason I have invested in ESP and included ESP in the 2011 dividend machine portfolio, is the dividend.   This company lives to pay its investors.   Every year since 2008 the company pays a quarter dividend that is increased annually and pays a special extra dividend.

2013 is no exception.   ESP just declared another $1.00 special dividend to be paid on Dec. 19, 2013 to owners of record on Dec. 12, 2013.

Conclusion:

This is a well managed company.  ESP has a proven history.  It is financially solid and has delivered excellent price increases.    Although it is a microcap stock, you should consider it for the income producing portion of your investment portfolio.

The Money Madam

Link to 2011 Dividend Machine ESP

Related articles

• ESPEY MFG & ELECTRONICS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Read more »

Dividends & Income from Potash POT

The world’s population continues to grow as does the need to feed people.   This fact is real no matter what the Federal Reserve’s policy on borrowing is or how dysfunctional our Congress is.  Economies can grow and contract, but the need to feed an ever growing population is permanent.   

Growing food requires fertilizer.

Con Agra (CAG) and DuPont (DD) were part of my portfolio until recently.   CAG’s stock price increased and forced me to set a stop.   When CAG weakened, the stop was hit.  DuPont (DD) and Dow Chemical (DOW) did not perform quite as poorly.   I lost my position in each of these two companies when I sold calls at strike prices that provided significant profit.  

I want investments in this space.  I think opportunities exist that will duplicate my experience with CAG, DD and DOW and provide income with capital gains.

Use Market Volatility to Find Bargains.

Potash (POT) is my target.   Potash’s stock price took a terrible plunge the end of July from $44 per share to $28 per share.  The plunge was related to a quarter of weak earnings.   All of the stocks in this space tend to be volatile, but POT is more volatile because its mines are in unstable places and can be affected by local unrest.    Lately, POT has scratched its way back up to the low $30’s.   I think this is a bargain price for yield hungry investors.

Take Profit and Reinvest for More Income.

Like all companies in this space, POT has been a regular dividend producer.   Although POT is not technically a Dividend Machine because it has not consistently raised the dividend every four quarters, the ten year dividend history is encouraging.    

If you owned POT in 2003 you would have received $.25 per share in quarterly dividends and today you get $.35 per share; a forty percent increase in income over ten years.

As an income investor I will move my proceeds from CAG, DD and DOW which provided just above three percent to POT which yields 4.34%.    Moreover, POT like these other companies, has enough volatility to provide covered call income potential.

Dividend Fundamentals.

This table presents the key data I use to determine if I want to buy a stock.   

Notice that POT pays a 4.34% dividend yield with a very low debt to equity ratio of .35.    Even during the rough years of 2008 and 2009, POT continued to pay a dividend.

This investment is not for the investor who cannot tolerate volatility.   However, the patient income investor, I think, will benefit from owning POT.   Do your own research; and there is plenty of opinion about this stock; then decide if POT’s enticing yield of 4.34% fits into the income producing portion of your portfolio.

The Money Madam

Read more »