5 Small-Caps with More than 10 Years of Dividend Growth

Investing in small-cap stocks can be rewarding. History shows that small-cap stocks provide better risk-adjusted returns than broader-market portfolios. When one adds dividends to the mix, small-cap dividend stocks can provide current income that magnifies total returns. Investors in small-cap dividend stocks should look for companies with sustainable payouts, proven history of dividend growth, solid balance sheets, and strong profitability.

Russell Investments has devised a specific small-cap-focused index, the Russell 2000 Dividend Achievers Index, which, based on the Mergent’s Dividend Achievers methodology, tracks liquid stocks of companies with ten or more consecutive years of dividend growth, the main criteria aside from firm size for inclusion in the index. The Index consists of 63 securities, most of which constitute good investments for investors looking for capital growth and current income. Here is a list of five small-cap Russell 2000 Dividend Achievers with yields above 2% that were randomly selected from several different industries represented by index constituents. The yields of the selected stocks exceed the average yields on the 10-Year Treasuries of 1.78%, the Russell 2000 Index of 1.92%, and the S&P 500 Index of 2.21%.

Watsco Inc (NYSE:WSO) is a $2.4-billion distributor of air conditioning, heating, and refrigeration equipment. The company’s dividend yields 3.3% on a payout ratio of 82% of trailing earnings and 45% of trailing free cash flow. Watsco’s dividend grew, on average, by 18.6% annually over the past five years. Analyst forecast the company’s 5-year EPS CAGR at almost 17%, which reverses the trend of negative growth, on average, over the past five years. The company is optimistic about it long-term growth prospects, given the recovery in the U.S. housing and the potentially large replacement demand for air conditioners and heating systems in the U.S. In addition to a solid balance sheet, this company has a free cash flow yield of 3.4% and an ROE of 11%. Its forward P/E is 21.5x, above its competitor Lennox International Inc. (NYSE:LII) 16.5x but below Comfort Systems USA, Inc. (NYSE:FIX) 30.9x. In October, Watsco paid a $5 per share special dividend. The company has paid dividends for 35 years and has raised them for 11 consecutive years.  Small-cap value investor Chuck Royce holds a position in this stock.

New Jersey Resources Corp (NYSE:NJR) is a $1.7-billion company that provides retail and wholesale energy services to customers in the United States. Its operating segments include gas distribution, energy services, and midstream assets. The company has paid dividends since its inception in 1953 and has raised them for the past 16 years. Its dividend yield is 4.0% on a payout ratio of 72%. NJR’s dividend growth over the past five years averaged 8.7% annually. The company’s 5-year EPS CAGR is forecast at about 4.0%. Steady customer growth and infrastructure investments are the main growth drivers. The stock is priced below the gas distribution industry. Its forward P/E is 16.2x versus 18.2x for its industry on average. The stock has an ROE of 12%. Among fund managers, Citadel Investment’s Ken Griffin has a small stake in the company.