3 Small-Cap Dividend Stocks Yielding Up to 14%

Can Small-Cap Stocks Deliver Big Returns?

It’s no secret that large-cap stocks have been some of the most solid dividend payers. They often have well-established market positions and can afford to dish out generous dividends year after year. For instance, both The Coca-Cola Co (NYSE:KO) and Johnson & Johnson (NYSE:JNJ) are mega-cap stocks with well over $100.0 billion of market cap, and both of them have been raising their payouts every year for more than five decades.

Small-cap stocks, on the other hand, are usually not the go-to choices for income investors. Because many small-cap companies are still in the growing stages of their businesses, they have to reinvest quite a bit of their profits, leaving less cash available to pay dividends.

However, that doesn’t mean investors should ignore small-cap stocks completely. In particular, since many large-cap stocks have become household names, they have gotten a large following in the investment community. So, as investors bid up their share prices, the dividend yields of these large-cap stocks drop.

The S&P 500 Index, which is made up of the 500 largest companies by market cap listed on the New York Stock Exchange (NYSE) or the Nasdaq, has an average dividend yield of just 1.89%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed April 12, 2018.)

Small-cap companies are much less followed than large-cap ones. As a result, their share prices are less bloated, meaning they might still be able to offer a substantial dividend yield. Moreover, even though these companies are generally less established than their large-cap counterparts, some of them actually generate enough recurring business to set up a stable dividend policy.

In fact, there have been an increasing number of small-cap stocks with regular dividend payments. Over the 20-year period ended December 2014, the number of dividend issues from S&P SmallCap 600 Index companies increased by 22.3%. (Source: “SmallCap Dividends: We all laughed at technology dividends a dozen years ago,” Indexology Blog, March 18, 2015.)

So today, let’s take a look at three small-cap stocks with big dividends. They yield up to 14%.

3 High-Yield Small-Cap Dividend Stocks

Chatham Lodging Trust

As a small-cap stock, Chatham Lodging Trust (NYSE:CLDT) has accomplished something that many large-cap companies have failed to do: pay a monthly dividend.

Think about it: the great majority of dividend-paying companies distribute on a quarterly basis. But since our bills have to be paid every month, it would make life a lot easier if dividend stocks matched that schedule. And that’s exactly what companies like Chatham Lodging Trust can provide.

Headquartered in West Palm Beach, Florida, Chatham Lodging Trust is a real estate investment trust (REIT) that invests primarily in upscale extended-stay hotels and premium-branded, select-service hotels. Its hotel portfolio includes well-known names such as “Residence Inn by Marriott,” “Homewood Suites by Hilton,” and “Hyatt Place.”

The company’s strategy is to focus on higher-growth markets. As of December 31, 2017, approximately 44% of Chatham’s portfolio was located on the West Coast, while another 30% of the portfolio was located in the Northwest. These high-growth, high-demand markets give the company pricing power.

According to Chatham’s latest investor presentation, the company’s hotels had an earnings before interest, tax, depreciation, and amortization (EBITDA) margin of 40.3% in 2017, leading its peer group. (Source: “Company Presentation April 2018,” Chatham Lodging Trust, last accessed April 12, 2018.)

With a monthly dividend rate of $0.11 per share, CLDT stock has an annual yield of 6.9%. For 2018, management expects the company to have an operating cash flow payout ratio of 71%, leaving a margin of safety.

Crestwood Equity Partners LP

By definition, a small-cap stock generally has a market cap of between $300.0 million and $2.0 billion. With a market cap of around $1.8 billion, Crestwood Equity Partners LP (NYSE:CEQP) is one of the biggest small-cap stocks in the current market. And it deserves that market cap due to an entrenched position in the midstream energy sector, a market known for having high barriers to entry.

Energy pipelines cost a lot of money to build. And even if you have the money, getting the regulatory approval to build a pipeline can take a substantial amount of time and effort. But Crestwood managed to have an integrated midstream asset portfolio with operations spanning across the United States.

The partnership provides a wide range of services, including the gathering, processing, compression, storage, and transportation of natural gas—and the gathering, storage, terminaling, and marketing of crude oil.

With a quarterly distribution rate of $0.60 per unit, Crestwood offers an annual yield of 9.1%, making CEQP one of the highest-yielding small-cap stocks in today’s market.

And if you are wondering how this energy partnership would perform in an uncertain commodity price environment, note that Crestwood’s cash flows are supported by fixed-fee contracts. Management currently expects the partnership to generate around 86% of its 2018 EBITDA from take-or-pay and fixed-fee contracts. This would significantly reduce CEQP’s exposure to volatility in oil and gas prices. (Source: “Investor Presentation March 2018,” Crestwood Equity Partners LP, last accessed April 12, 2018.)

Government Properties Income Trust

Government Properties Income Trust (NASDAQ:GOV) may be a small-cap stock by market capitalization, but it is actually one of the largest landlords to the U.S. federal government.

Headquartered in Newton, Massachusetts, Government Properties Income Trust is a REIT that specializes in owning and operating properties leased to government tenants and government contractors.

As of December 31, 2017, the company’s portfolio consisted of 108 properties located across 30 states and Washington D.C., totaling approximately 17.5 million square feet. (Source: “Investor Presentation March 2018,” Government Properties Income Trust, last accessed April 12, 2018.)

The neat thing about having government tenants is that they tend to remain in one place for long periods of time. If you want to rent out your house, you’d be considered lucky to find someone who’s willing to sign a one-year lease. U.S. government tenants, on the other hand, have historically occupied the same spaces for more than 20 years.

With a stable business model, Government Properties Income Trust has become one of the most generous dividend payers in the current stock market. Trading at $12.28 apiece, GOV stock offers an annual dividend yield of 14%.

The payout looks safe. In 2017, Government Properties Income Trust generated normalized funds from operations (FFO) of $2.02 per share while declaring $1.72 of dividends per share. That translated to a payout ratio of 85%. (Source: “Government Properties Income Trust Announces Fourth Quarter and Year End 2017 Results,” Government Properties Income Trust, February 26, 2018.)