Yale finance professor Roger Ibbotson believes thinly traded stocks outperform those with greater liquidity and he's got the research to prove it. Using stock returns all the way back to 1972, his research shows that stocks of all sizes with low annual trading volumes outperform those with higher volumes - and not just by a little. Thinly traded micro caps outperformed actively traded ones by 12 percentage points a year, and mega caps, the lowest spread amongst all caps, outperformed by 2.8 percentage points annually. Winning stocks come from the most unlikely places. Here are four stocks with low volumes and high returns.

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Micro Cap: LCNB Corp. (Nasdaq:LCNB)

The Lebanon Citizens National Bank dates back to 1877. In its 133-year history, there have been just 10 presidents, with the current one, Steve Foster, in the job since 2008, but with the company for 33 years. This is a management team with plenty of experience serving its Ohio customers. There's not much to tell about this bank except that it's solid financially, paying a dividend of at least 58 cents a share since 2005, and at current prices it's yielding 5.4%. For the first nine months of 2010, this bank earned $1.03 a share, up 39% year-over-year. While this jump likely won't result in a dividend increase, it's comforting to know operations are running smoothly.

Small Cap - Greif Inc. (NYSE:GEF.B)

A world leader in industrial products and packaging, the company got its start in the same year and state as LCNB. Business has been good for the Ohio company this past decade with sales increasing every year but 2009. This year is shaping up to be one of its best ever with earnings per share in the $4.15 to $4.35 range. That's more than enough to pay the $2.33 in dividends Class B shareholders received in 2010. The company's increased its dividends per share in nine of the last 10 years and likely will do so in 2011. The company's annualized total return since 2000 is 17.1%, much better than the S&P 500, which was up less than 1% annually in the same period. If you can get over the dual-class share structure, it has a good dividend yield currently and a bright future.

Mid Cap - Hubbell Inc. (NYSE:HUB.A)

This is another company with a dual-class share structure. Many investors don't like them, but I see it as an effective tool for keeping corporate boards honest. Most importantly, their stock performance is often better than single share companies. In the case of Hubbell, the manufacturer of electrical and electronic products for residential and non-residential markets has a 10-year annualized return of 10.5%. Any company achieving this kind of return is worth knowing regardless of the share structure. So far, in 2010, its stock is up 15.5%. In its third-quarter earnings release the company emphasized focusing on operating margin improvement and that the year-end results should bring an increase of approximately 180 basis points. What's not to like?

Large Cap - National Bank of Canada(OTCBB:NTIOF)

The National Bank of Canada is the sixth largest bank in Canada and number one in its home province of Quebec. Business is good for the smallest of the Canadian "big banks." In the third quarter ended July 31, its net income was C$271 million with earnings per share of C$1.56. In the last 10 years, the bank's best year in terms of profits was 2006 when it hit C$871 million. Considering it generated net income of C$241 million in the fourth quarter a year ago, it would take a serious misstep for earnings not to outdo its 2006 record. While its stock isn't dirt-cheap right now, its dividend yield of 3.7% is very attractive.

Bottom Line

All four of these stocks trade less than 10,000 shares a day and while this might cause a fund manager to pass, Ibbotson's research shows individuals have nothing to fear. (For more, see Technical Analysis: The Importance of Volume.)

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