Big dividends are often associated with the biggest and most entrenched businesses. Yet, some small caps are showing up with some fantastic yields and in many cases, nearly double that of U.S. Treasuries and multiples of the yield paid out by many large corporations. (For more, see Why Dividends Matter.)
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As Good as it Lasts
A dividend is only as good as the most recent quarter in which it is paid. So any dividend yield that looks above the normal rate paid by others in the industry should be examined with skepticism. A dividend yield of 3.5% from Johnson and Johnson (NYSE:JNJ) is better than most as J & J has been paying and increasing its dividend for decades. Having said this, most companies that pay a dividend do not want to suspend or eliminate it as that will cause many shareholders to flee to stock. The dry bulk shipping industry is a prime example. Before the recession, most dry bulk shippers were paying quality dividend yields. But as credit markets froze, the debt-laden industry was forced to eliminate dividend in order to satisfy creditors. Still, some shippers like Star Bulk Carriers (Nasdaq:SBLK) have managed to maintain the dividend and currently yields 7.5%. Unfortunately, the nice dividend has merely been a band-aid on a stock price that still remains near a multi-year low.
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On the other hand, small-cap Florida insurance company Homeowner's Choice (Nasdaq:HCII) has both a great dividend and good growth over the years ahead. Shares closed Tuesday at $8.35 and yield 4.8%. The company just began paying a dividend in the middle of 2010, so it's likely management is confident about the years ahead in terms of profits and ability to pay the dividend. Telular Corporation (Nasdaq:WRLS) is another solid company that just rewarded shareholders with a special dividend and a regular dividend. This developer and distributor of wireless communication technology in areas such as home security yields near 6%. A recent acquisition looks primed to propel growth further. Shares nearly doubled after the announcement of the dividends and currently trade near $7. If Telular's quality management continues executing, there could more upside ahead.
Dividends are only attractive when they are sustainable and of course, the underlying business is a quality one with a good share. They should never be a primary reason for investing, except in special instances. However, when they are a supplement to a quality investment, then they can create tremendous long-term value. (For more, see Dividend Facts You May Not Know.)
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