Quality Dividends From Little Stocks

 | Jun 11, 2013 | 1:30 PM EDT
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While larger companies usually have quality dividend payouts, some small companies are also capable of paying attractive, sustainable dividends. Dividends have nothing to do with size and everything to do with the ability to pay.

In some cases, a quality dividend can come from a very small, microcap company. In fact, because of the obscurity of some microcaps and because a many people in the investment community is structurally or legally prohibited from investing in them, the dividends can be unbelievably attractive.

A little over a year ago, a microcap insurance company I recommended, Homeowners Choice (HCI), was trading for around $9 and paying around $0.60 a year, yielding around 7%. Today that company is trading for $34 and paying $0.90 a year in dividends.

Moving to the present, Ark Restaurants (ARKR), a name I have mentioned in my columns, is still worth a mention. Trading at $21, the company has a market cap of $70 million and yields 4.6%. Ark has rejected an offer of $22 per share from Landry's, a national diversified group of restaurant concepts. Given the current share price, Landry's best efforts are likely to come up empty, especially since Ark insiders control more than 40% of the stock. Landry's will have to offer a higher price, otherwise it makes no sense for shareholders to give up a near 5% yield from a growing restaurant chain. I should note that Ark has formally rejected the offer, and the stock still trades near $22. Perhaps a higher offer is in the works.

Speaking of insurance, the property and casualty insurance company Unico American (UNAM) today offers a 7.6% yield. I should note, however, that Unico does not pay regular dividends but rather effectuates dividends at year-end, according to the board of directors. But since management and directors own more than 50% of the company, there's zero incentive to withhold cash from shareholders if it's prudent to pay it out. That being said, Unico is a quality small-cap insurance company that has a consistent track record of underwriting profitability and currently trades at par to book value.

A dividend that looks uncharacteristically high can be a market signal that the dividend is unsustainable. That assessment is often correct. On the other hand, it's also true that these high dividends go unnoticed by the overall market because of the size of the underlying company. In addition, many people associate dividends with stagnant, boring businesses, and many investors want microcaps that have rapidly rising stock prices. The net result is a missed opportunity to enjoy a double dip of a great dividend and significant capital appreciation.

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