Small Stocks Can Pay Big

 | Aug 26, 2013 | 12:00 PM EDT
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Contrary to popular opinion, the biggest dividends don't usually come from the biggest companies. What is generally true, however, is that the best dividends can often come from the biggest enterprises.

Dividend yield matters not one iota if the dividend can't be counted on. In some instances, you can get a double dip with small-cap stocks that pay out attractive dividends -- the opportunity for continuing dividends along with the upside potential from being a small-cap company. One does have to tread carefully, but even if you are only invested for two to three years, the total return of stock appreciation and dividend yield can be quite tasty.

Let's take a quick blast to the past with a name I shared a few years ago -- Bretiburn Energy Partners (BBEP), an oil and gas master limited partnership. At the time, shares were trading below $10 after the company had to temporarily suspend its payout to get its house back in order. The thesis was that BBEP was not damaged goods, but merely a turnaround play.

Today, the BBEP trades for $18 and pays out nearly $2 a share -- good for an 11% yield today and a 20% yield had you bought the shares when they were in decline. That oversized yield is on top of the 90% appreciation in the share price.

 Safety Insurance (SAFT) is a $790 million property and casualty insurance company. The shares currently yield 4.7%. Dividends have been paid without interruption for the past 10 years and have grown from 44 cents a share to $2.40 a share today. The company is a disciplined insurer having delivered an underwriting profit in the 9 of the last 10 years as well.

Frisch's Restaurants (FRS) introduced Cincinnati to its first drive-thru restaurant back in 1946. Today, the company operates 95 locations and franchises another 25. The menu specializes in burgers, desserts, and other favorites like fish and chips and country fried steak. Shares are trading for $20, down from $33, creating a yield of 3.2%. That yield, however, does not seem as enticing as it normally would unless FRS shares can get back to where they once traded.

The company has been profitably ever year since 2004 although profitably fell to an all time low to $5.8 million in 2012 from nearly $10 million in 2011. Still, restaurants tend to be very attractive cash flow-producing vehicles that attract the attention of activists and turnaround specialists.

Another attractive buyout interest could be Orchids Paper Products (TIS), a consumer products company that makes and sales paper towels, napkins, and other consumer paper products. Their products are sold in dollar stores, grocery stores, and discount retailers.

Shares yield 5% and the TIS boasts a market cap of $222 million. The company just commenced dividends in 2011, but nearly doubled the payout from 50 cents in 2011 to 85 cents in 2012. Today, the payout is equal to $1.40 a share. The stock has also been on a tear, climbing from less than $9 in 2009 to $28 today. The company has a pristine balance sheet and is a healthy generator of cash flow.

A high quality small-cap can deliver quality dividends. Indeed, smaller companies can hurt more when economic conditions worsen. Still, many small companies have high insider ownership ratios -- 30% at Frisch and Orchid -- and thus, incentivize them to not only pay dividends but also to run a shareholder-oriented company.

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