Showing posts with label small cap stocks. Show all posts
Showing posts with label small cap stocks. Show all posts

Wednesday, July 8, 2015

Small Cap Dividend Machines

Small cap stocks are defined as having a market capitalization of less than $3 Billion.  Microcap stocks are defined as having a market capitalization less than $300 million.   Some stocks are even smaller.  Those with a market capitalization of less than $50 million are considered nano caps.  Of course most investors are more familiar with medium, large, and mega capitalized stocks.

When building a portfolio of income stocks, the smaller stocks have a place.  They have a big disadvantage and that is liquidity.   By liquidity I refer to the ability to sell your stake in the stock.  Mutual funds have restrictions on buying the shares of these stocks and therefore, your potential buyers are limited.  On the other hand, a well selected dividend producing stock can be cheap; it can provide reliable dividend increases and in some cases a nice capital gain.

I took a look at my 2011 portfolio to see how the smaller companies performed over the past five years.

2011 Small Cap stocks

Out of the 52 stocks I picked for the 2011 model portfolio, 13 qualified as small or microcap.  Small cap refers to stocks that have more than $300 Million and less than $3 Billion in market capitalization.    Microcap stocks are between $50 Million and $300 Million. 

I did not try to diversify the portfolio by market capitalization.   I simply analyzed the result of my using four criteria to pick stocks and then calculated their market capitalization. 

Comparison of Small Cap 2011 stocks with total portfolio.

Two tables are presented below.   One is the result of the stock in the 2011 portfolio that are small cap or smaller and the second table reports on the total 2011 portfolio.

Small Cap Goup

As compared with the total 2011 Dividend Machine portfolio, the small caps have underperformed.  The entire portfolio has gained 56.24% since inception.   These 13 stocks have gained only 38%.  The caveat is that two stocks were sold and those proceeds are not reinvested; they are held as cash with no chance for capital gain.

Dividend appreciation of the total portfolio is 24.71% whereas the small cap group has gained only 10.43%.  I measured this using the 11 stocks remaining in the small cap group after HGIC and MPR were sold.   

Two small stocks are poor performers.  Landauer, symbol LDR, has halved its dividend recently and the stock price reflects that negative event with a capital loss of 22%.  Espey Manufacturing, symbol ESP has barely increased the dividend over the past five years and its price is flat.

Two stocks were home runs.   HGIC was sold for a 92% gain.  In the real world, you would reinvest that money, but in my model portfolios, I carry that gain as cash.   The best capital gains performer that is still in the portfolio is Utah Medical, symbol UTMD up 114% over these five years.  

Westwood Holdings group, symbol WHG is the kind of stock we all want.  WHG provided a capital gain of 59% and a dividend increase of 42.86%.   Mine Safety Appliances, symbol MSA, provided a capital gain of 60% and a dividend increase of 28%.

When you buy small cap stocks you need to remember that these are not stocks that command covered call premiums so you have to be happy with the current dividend and with the dividend appreciation history.  


Disclosure:  Long UVV, NHI, ESP, YORW, WHG

Links to previous articles on this subject:

Read more »

Sunday, December 1, 2013

Small Cap Dividends and Income - Auburn National Bancorp AUBN

This post discusses how Auburn National Bancorp, symbol AUBN, qualifies as a Dividend Machine and has two features that make me want to add it to the income producing portion of my portfolio.

AUBN meets all four Dividend Machine criteria.   This is a small Alabama bank that has been in business since 1990.  AUBN’s dividend history is solid.   If you own AUBN by 12/10/2013 you will receive a quarterly dividend of $.21 on 12/26/2013.   Ten years ago your December quarterly dividend was $.12.  The dividend increase works out to 7.5% per year.    This is good for a small bank that continued to pay you during the financial crises of 2008/2009.   A snapshot of AUBN’s Dividend Machine bona fides is presented in the table below. 

Can you better the Dividend Machine strategy?

Your strategy is dividends and income.  You know you need to beat the 10 year treasury income.  You know your income needs to increase every year.  You want a low risk stock but you are experienced enough to know that even when a major disruption in stock prices occurs, many companies will continue to pay you and even increase your income during these troubled times.   You are disciplined and will stick with your picks. 

Just look at the 2011 Dividend Machine Portfolio and you will find that at least during that year, you could use only four criteria to pick a darn good portfolio of dividend stocks.  The question is, could you do better than the Dividend Machines?

Today I am profiling AUBN and I have two reasons above and beyond the Dividend Machine criteria that make me like this stock.   One is my view of the interest rate curve and the other is the outperformance of small cap stocks.

Interest Rate Curve benefits banks:

Banks lend out the money you deposit.   When they can lend the money at a greater rate than they pay you for holding your money safely, the banks make money.   Today, even small banks, like AUBN, engage in financial transactions that are broader than just making money on your deposits but the effect of rising interest rates on a bank’s ability to make money benefits the bank’s owners.   Interest rates are on the rise.   Nothing alarming yet in terms of inflation, but they are on the rise and that should benefit a banking stock like AUBN.

Small cap Stocks do better:

In a recent post I used another Dividend Machine stock, ESP, to illustrate the positive history of small cap stocks.  AUBN is another example of how well a small cap stock can benefit the income investor’s portfolio.  Vanguard Investments published this report which shows small caps do well.  AUBN’s capitalization is $90 million. 

Consider Auburn National Bancorp for the income producing portion of your portfolio.  AUBN qualified as a Dividend Machine in 2012 and it shows up again today as a stock that meets all four Dividend Machine criteria plus it can take advantage of the interest rate curve and the advantage of being a small cap stock.

The Money Madam
Read more »