Top Small Cap Dividend Stocks To Buy

| June 15, 2015 | 0 Comments

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History sure is intoxicating.

Last night it swept me away once again like it always does, this time back to the early 1970s and the Nixon White House.

A bunch of those Oval Office tapes, 3,700 hours of them, have been cleaned up and released.

Reading the transcripts with Nixon, Kissinger, Haldeman, and Erlichman have taken me back to the days when gas cost 36 cents a gallon and a dozen eggs went for 53 cents.


Want a history lesson that’s going to make you some money?

Here’s a quick one.  Small stocks have a way of delivering big returns.

Historically, small cap stocks have outperformed the market.  One of the reasons why is a bit strange when you think about it, because it has nothing to do with the financial performance of the company.

A lot of small cap stocks fly under the radar.  They’re not the darlings of jittery and critical Wall Street analysts.  These stocks are removed from the “Fishbowl effect” where coverage can irrationally send the stock price skidding or soaring.  These small cap dividend stocks quietly go about their business and grow.

In a minute, I’ll introduce you to two small cap dividend stocks, and you’ll see two very different roads to go down.  One is profitable and the other is perilous.

But first, here’s something to keep in mind with small cap dividend stocks.

You’ve got to balance a track record of past performance with solid prospects for the future.

Some of the small caps that are top dividend paying stocks might tend to be younger companies.  The best is yet to come.  There’s plenty of opportunity for revenue growth, stronger earnings, and the groundwork for growing dividends.

But you never want to turn your back on a solid track record of dividend growth.  There’s a lot to be said for past performance.  So when you find solid, small cap stocks with a bright future that pay consistent dividends… you’ve hit the sweet spot.

The trick is you need to make sure the company is growing the dividend – and can keep growing it.  You want to make sure you’re not lured into a small cap that you think is one of the best dividend stocks, but turns out to be a dud.

Where To Find The Top Small Cap Dividend Stocks

Here’s one place I like to prowl for good small cap dividend stocks.

There’s a group of 200+ stocks called the NASDAQ Dividend Achievers.  These are smaller companies that have been increasing their dividend payments for at least 10 years in a row.

This is where you find smaller utility companies, regional banks, manufacturing firms, and a hodgepodge of stocks most people have never heard of.

But you also run into some well-known names like Cracker Barrel $CBRL. Cracker Barrel is a great example of what to look for… and what not to look for… in a small cap dividend stock.

Whenever I drive by one, the parking lot is always jammed, and that gets my attention.

Is Cracker Barrel Old Country Store Inc. one of the top small cap dividend stocks to buy?  The yield looks appealing, right around 3%.

Well, it’s technically not a small cap because of a $3.5 billion market cap.  Small caps are usually under $3 billion.

It’s also expensive, with a P/E ratio of 23.74.  (I like to buy below the overall market price earnings ratio, which is 18.)

And the Cracker Barrel dividend payout ratio is a little high for my liking, up at 66%.

So I’d pass on Cracker Barrel.  Drive on by.  Dig a bit deeper and see if you can find a lower dividend payout ratio, maybe a stock that’s got a bit more runway ahead of it, and more room to grow.

This “room to grow” consideration is important.  And here’s why it could mean trouble ahead for Cracker Barrel.

The Top Small Cap Dividend Stocks Are Ready For The Future

Cracker Barrel has been around since Nixon was in the White House, 1969 to be exact.  It went public in 1981.  I’d say its best days are probably now behind it.

Demographics aren’t on its side.  Down home country cooking will never go away, but with growing public concern about nutrition and chemical food additives, it’s not exactly in prime position for the future.

These are some of the things you want to think about when you’re sizing up a stock.  Just don’t get carried away.  You should never fall in love with one single stock and you should never fall in love with one single trend.  We’re not going to stop eating cheeseburgers and go on a tofu binge that lasts for decades.

But try to take a trend and put it in perspective.

The parking lot at Cracker Barrel might be full, but when you find an empty spot, you’re probably not pulling in between a Prius or a Nissan Cube.  You see pickup trucks and big sedans.

What does this have to do with the best dividend stocks to buy?

Tomorrow’s customers.   The Cracker Barrel customer base is aging.  Loyalists are dying off.  And all those orders of Sawmill Gravy and Homemade Buttermilk Biscuits could even be speeding up the process.

The future matters, because…

To Grow Dividends, It Takes Earnings Growth

Without earnings growth, if the dividend payout stays the same or grows, and you see the dividend payout ratio edging up, that’s not a good sign.

This is why you want your small cap dividend stock to be prepared for a long and healthy future.

Look at a small cap like RLI Corp. $RLI.  It’s been around longer than the Super Bowl, so we’re not talking about an upstart.  But RLI has a profitable past and a promising future.

The market cap is $2.15 billion.  The dividend has been growing since 1977.  The dividend payout ratio is 33.9%, the P/E ratio is below 16, and the yield is 1.53%.

Not the greatest yield, but plenty of room to grow, and that’s what we want.

RLI is an insurance company, in the property and casualty business.  It sells insurance for very specialized situations, like liability coverage for architects or marinas.

Not the most glamorous stuff for a smallish company based in Peoria, IL, but year after year, it just keeps plugging away.

Check out the past 20 years… a model of consistency.  RLI is your poster child top small cap dividend stock.


It’s the future we need to focus on with small caps if they’re going to keep piling on the dividend growth.

As long as there’s a market for specialized insurance, RLI should be in good shape.

One More Thing About The Top Small Cap Dividend Stocks To Buy

Don’t fall in love with high yield.  It should never be your #1 reason for buying a dividend stock.

You’ll probably do better over the long haul with something more modest, where you get a dividend yield for a good night’s sleep.

Compounding and dividend growth will take care of your total returns.

Right now there’s a stock on the NASDAQ Dividend Achievers that pays a 5.6% yield.

But it looks a bit shaky.  I wouldn’t be surprised if this company has hit the end of the growth line and won’t be one of those stocks with the highest dividend yield much longer.

There’s no need to swing for the fence with your small cap dividend stocks.  Find a well-run company that’s in a good business, something quiet and sensible.

And if you stop in at Cracker Barrel for breakfast, take it easy on the Sawmill Gravy.


Paul Duke

Note:  Paul Duke writes and edits  Sign up for our free dividend reports and dividend newsletter at  We’ll show you how to create regular income by investing in dividend stocks, easily, step-by-step.

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Category: Dividend Stocks To Buy?

About the Author ()

Paul “Dividend” Duke is a veteran investor with a longstanding interest in dividend stocks. He brings a balance of both technical and fundamental analysis to his work, and focuses on opportunities that provide safety, capital appreciation, and income.

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