2 Small-Cap Stocks That Also Pay Dividends

By TradeSmith Research Team

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We received an overwhelming response that you would like to see more small-cap stock coverage, and I want to oblige in this issue of TradeSmith Daily.

Small-cap stocks are the stocks of companies with market caps generally between $300 million and $2 billion, and they can make for attractive revenue growth stories.

For example, Microsoft Inc. (MSFT) generated $168 billion in revenue in 2021, a 17% increase from the $143 billion generated in 2020. On its own, generating that much money is a massive accomplishment, but the percentage increase doesn’t excite most analysts or investors.

What does get people excited is hearing that a company went from bringing in $100 million in 2020 to bringing in $200 million in 2021, which would be a 100% increase in revenue.

And that excitement leads to more analysts covering the company, more talking heads on financial news shows pounding the table to buy the company, and more investors running out to buy the stock.

With the right small-cap stock investment, you can experience tremendous gains from stock price appreciation… and on top of that, some small-cap companies pass their earnings on to you as income in the form of dividend payouts. So, in addition to making money as the stock price rises, you can collect dividend payouts or even put them to work in a dividend reinvestment plan (DRIP) to buy more shares.

Today, I’m going to share two small-cap dividend stocks that also pay dividends.

For this specific list, I used three criteria to help minimize risk and maximize potential value:

  • The stock is in our Health Indicator Green Zone, which indicates the company is in a healthy state and considered a “buy.”
  • The stock has a Volatility Quotient (VQ) of less than 30% (the lower the percentage, the less risk is associated with investing in the stock), as small-cap stocks can experience more volatile price swings than larger, more-established companies.
  • The company has a market cap of less than $1 billion, which means the stock may not receive much mainstream coverage and could be an under-the-radar investment.
Let’s jump right in.

Small-Cap Dividend Stock No. 1: Nathan’s Famous Inc. (NATH)

Market Cap: $312.91 million
VQ: 29.78%
Dividend Yield: 2.61%

Snapshot: Starting out as a nickel hot dog stand on Coney Island in 1916, you can now find Nathan’s products in more than 65,000 supermarkets across America and watch Joey Chestnut usually eat 60 or more at the annual Nathan’s Hot Dog Eating Contest.

Beyond hot dogs, the company also sells buns, condiments, pickles, and Coney Island pretzel and bagel dogs.

The company had several headwinds over the last two years — like many others in the food business — including COVID-19 lockdowns and higher food costs.

But things are normalizing, with the largest part of the company’s business, its licensing program, increasing in revenue 1.5% from 2021 to 2022.

And Nathan’s could see a bigger jump in licensing revenue as it expands its powerful brand across the world.

It has 239 franchised operations and four company-owned operations across 18 states and 12 countries. It also has 287 “virtual kitchens,” where restaurants with surplus kitchen capacity serve as hosts for the brand.

Nathan’s has expansion plans in Ireland, Europe, the United Kingdom, and the Middle East. The hot dog maker partnered with a specialty German sausage manufacturer to expand distribution across Europe, and it also collaborated with another company to bring Nathan’s Famous hot dogs to France.

Small-Cap Dividend Stock No. 2: Argan Inc. (AGX)

Market Cap: $527.57 million
VQ: 25.58%
Dividend Yield: 2.57%

Snapshot: Argan is a holding company that owns and operates four subsidiaries:

  • Gemma Power Systems — constructs solar facilities, wind farms, biofuel plants, and more across the United States.
  • The Roberts Company — provides custom design and fabrication of manufacturing operations equipment for the pharmaceutical, pulp and paper, mining, and chemical processing industry. Also provides construction and other services.
  • Atlantic Projects Company — provides engineering services for the installation, commissioning, and maintenance of thermal power plants worldwide.
  • SMC Infrastructure Solutions — provides services for increased cellular and wireless coverage and infrastructure to support data, voice, broadband, video, and security applications.

Gemma is an attractive segment within Argan, as the world’s energy consumption is only going to increase — the U.S. Energy Information Administration (EIA) projected in 2019 that the world’s energy usage would increase 50% by 2050.

But in total, the diversified revenue sources are a positive for Argan, as an upswing in any one market can help offset losses from other segments.

The company also made a shareholder-friendly move in December 2022, announcing it would up its share repurchase program from $100 million to $125 million.

Bottom Line: Owning small-cap stocks that also pay dividends is the same as having your cake and eating it too.

For those who appreciate dividend payouts, you get to tack on the potential for significant stock price appreciation.

For those who typically seek stock price appreciation, you get bonus income through dividend payouts.