Large-cap high-quality dividend growth stocks are kind of my bread-and-butter, both as an investor and a writer.
That’s because there’s an element of safety there when you’re investing in the likes of Johnson & Johnson (JNJ) or PepsiCo, Inc. (PEP).
These are mega-companies that are unlikely to suffer any kind of business shock that would imperil their ability to pay increasing dividends, which offers me more than a modicum of assurance that my passive income should continue to roll in and increase.
It’s really all about minimizing risk of income loss. I want to invest in the safest dividends out there.
Moreover, most companies that have had the time to build up a track record of increasing dividends for decades on end are large by their very nature, as all those years of increasing profit (which is used to fund those increasing dividends) means the companies are becoming worth more as a consequence.
In addition, most small companies that are just starting out need to retain and reinvest most or all of their profit, as this capital is used to continue to growing operations precisely when both growth potential and the thirst for capital are at their peak.
As such, it’s not common to find small companies that have paid shareholders increasing dividends for years on end.
But that’s not always the case.
In fact, some of my best investments (in terms of both aggregate dividend income and total return) have been in the small-cap space.
And so I’m going to discuss a few small-cap dividend growth stocks that have done fairly well for me. And I think all of them have safe dividends, high-quality fundamentals, and competitive advantages.
In my opinion, all of them are fairly good long-term investment opportunities today.
The following text will not represent full analyses; rather, I’m just providing some compelling long-term ideas for further research.
Armanino Foods of Distinction Inc. (AMNF)
Armanino Foods of Distinction produces, markets, and sells a variety of frozen Italian specialty foods.
This is one of my favorite stocks in my portfolio. And that’s saying a lot when considering I’m invested in more than 100 different businesses.
While a lot of large food companies out there are struggling to grow right now, Armanino Foods continues to grow both its top and bottom lines at healthy rates, which allows for continued dividend growth. On top of that, the stock is available at a discount to most other stocks in the packaged food space.
The company just registered its highest-ever quarterly sales and earnings report. For perspective, net sales for Q2 FY 2017 increased by 18% YOY; earnings per share grew by 17%. And this is all while they continue to reinvest back in the business via a plant expansion project.
The balance sheet is spotless. And profitability is outstanding.
This is a company with a market cap of only ~$71 million, so that’s something to keep in mind.
But they’ve nonetheless paid an increasing dividend for 11 consecutive years. The 10-year dividend growth rate is 12.3%. The payout ratio is a little over 60%. The odds appear strong that the company continues to not only pay a dividend, but increase it at a rate strongly in excess of inflation.
With a P/E ratio of under 18 (well below the broader market and most other food stocks) and a yield of 3.60% (well above the market and most other food stocks), this small-cap dividend growth stock is a real gem, in my view.
Southside Bancshares, Inc. (SBSI)
Southside Bancshares is a bank holding company based out of Texas.
This small bank (market cap of just over $1 billion) is a well-run financial institution that just continues to deliver year after year.
The company just recently announced results for its second quarter of FY 2017.
All they did was increase diluted EPS by almost 17% while also improving ROE and ROA.
With 23 consecutive years of dividend increases, a 10-year dividend growth rate of 13.4%, a payout ratio of ~60%, and a yield of 2.79%, there’s pretty much nothing to like about this stock from a dividend growth perspective. Plus, the company pays out a 5% stock dividend every year. And that’s on top of regular special dividends, too.
Indeed, the dividend metrics are better than what the big domestic banks offer, as Southside never cut its dividend during the financial crisis.
That’s because the bank barely blinked over that time frame, with revenue and EPS more or less chugging right along from 2007-2010.
While I view small banks as particularly risky, Southside has never given me reason to be concerned.
The valuation might be the only thing to not like here. With a P/E ratio of 19.11, it’s trading above its five-year average. However, I think this is a bank that was arguably cheaper than it should have been over that time frame, which perhaps leaves some room for the correction of a prior incorrect valuation. Said another way, I think some of the valuation expansion has been warranted.
OTC Markets Group Inc. (OTCM)
OTC Markets Group operates financial markets for over 10,000 securities in the US and globally.
The market cap for this company is just under $275 million.
Talk about an oligopoly. If you want to list securities, you have very limited options. When you buy stocks, you’re primarily buying stocks via the NYSE, Nasdaq, or OTC platforms. And while their Pink open market is often known as “pink sheets”, many large-cap stocks are listed on OTC platforms. For instance, Nestle SA (NSRGY) is an OTC stock. So is AMNF (discussed above). Of course, so is OTCM. Cheaper costs and/or lower regulatory hurdles are just a couple reasons to choose an OTC platform over a competitor.
The company recently reported Q1 results for FY 2017. Revenue grew by 5% YOY. Adjusted EPS came in at 10% higher than Q1 FY 2016. Operating profit margin improved from 31% to 33%. Profitability is fantastic, as one could imagine.
Meanwhile, the dividend is gravy.
They’ve increased their dividend for seven consecutive years, which is about as long as the track record can be (considering their IPO in 2009). The five-year dividend growth rate is 28.5%, the payout ratio is under 60%, and the stock yields 2.33% right now.
Plus, they regularly pay special dividends. The last special dividend, which was $0.60 and paid late last year, was approximately 3% all by itself.
The only thing about the dividend is that the increases aren’t as clockwork as I’d like to see. The special dividends make up for some of this, but it’s an issue that I hope is worked out over time.
Looking at the valuation, the stock trades for a P/E ratio of a little over 24. That’s higher than the broader market, and it’s higher than the stock’s own five-year average, but it’s at a sizable discount to the industry average.
We’re talking about a captive customer base within an oligopoly structure. It’s tough for OTC Markets Group to do anything but print money looking forward, outside of some unforeseen major regulatory change to the markets.
These are all rather small companies. As such, unique risks and opportunities are present.
But I’m personally invested in all three companies. And they’ve been fine investments for me thus far.
All in all, I consider all three businesses to operate at levels much higher than most other companies. And with valuations that aren’t all that crazy relative to either the market or their own industries, I think we’re looking at above-average stocks at below-average valuations.
Full disclosure: I’m long all aforementioned stocks.
Do these ideas look compelling to you? Are you a shareholder in any of these companies? Have they performed well for you?
Thanks for reading.
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net.