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American Realty Capital Properties Inc (ARCP), American States Water Co (AWR): 5 Small-Cap Momentum Plays for Dividend Investors

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Editor’s Note: Related tickers: American Realty Capital Properties Inc (NASDAQ:ARCP), American States Water Co (NYSE:AWR), UNS Energy Corp (NYSE:UNS), Otter Tail Corporation (NASDAQ:OTTR), PNM Resources Inc (NYSE:PNM)

Recently, we wrote about large- and medium-cap momentum stocks, as a way to complement traditional style-based investment strategies focused on value and growth. Dividend investors can also complement their investment strategies with momentum stocks, with a focus on strong total returns. Based on AQR Capital Management’s momentum methodology, which measures the stocks total returns (including reinvested dividends) over the past 12 months (excluding the last month), here is a glance at five small-cap momentum plays paying dividend yields in excess of 2%.

American States Water Co

These stocks were newly added to the AQR Small-Cap Momentum Index during the index’s reconstitution at the end of March. They represent a good starting point in research of stocks that can offer strong total returns in the near term—much like this market-beating strategy.

American Realty Capital Properties

American Realty Capital Properties Inc (NASDAQ:ARCP), the fourth-largest publically traded net lease REIT, recently touched its record-high closing price. Over the past 12 months, the stock achieved a total return of 69.6%. American Realty Capital Properties Inc (NASDAQ:ARCP) has a dividend yield of 5.3% and a payout ratio of 98% of its fiscal 2013 adjusted FFO, based on the guidance midpoint. The excessively high payout ratio suggests a limited potential for dividend growth, but projected FFO expansion through American Realty Capital Trust III acquisition bodes well for future dividend stability and, possibly, growth. The company’s dividend, which is paid out monthly, has increased cumulatively by 2.7% since October 2011. American Realty Capital Properties Inc (NASDAQ:ARCP) boasts strong fundamentals and solid balance sheet.

This REIT has successfully maintained full occupancy of its properties. In the first quarter, it posted record operating results, and is forecasting adjusted FFO between $0.91 and $0.95 per share in fiscal 2013 and between $1.06 and $1.10 per share in fiscal 2014. The REIT intends to grow its asset base and base AFFO per share through execution of its organic acquisition program and buying large property portfolios, along with making strategic corporate acquisitions in the net lease sector. The stock is trading at 19.0x its fiscal 2013 adjusted FFO. Billionaire Steven Cohen has a large position in American Realty Capital Properties Inc (NASDAQ:ARCP); see Cohen’s top picks.

American States Water

American States Water Co (NYSE:AWR), a water services company and electricity distributor in California, realized a total return of 51.5% over the past 12 months. This low-volatility stock has paid regular dividends since 1931, and has raised them every year since 1954. At present, American States Water Co (NYSE:AWR)’s dividend yield is 2.6%, its payout ratio is 52% of the current-year EPS estimate, and its five-year annualized dividend growth rate is 7.6%. The company boosted its dividend by 27% in September 2012. Recently, American States Water Co (NYSE:AWR) posted financial results that beat analyst estimates, as diluted EPS increased 30.2% on tariffs.

On May 9, California Public Utilities Commission approved new rates for 2013–2015 for American States Water Co (NYSE:AWR)’s subsidiary, Golden State Water Company. The rates rise is expected to boost revenues by 3.4% from the prior year. The 2013 adopted water gross margin is projected to increase 6.6% from 2012. The stock is attractive as a dividend play given that American States Water Co (NYSE:AWR) operates in a favorable regulatory environment, which provides financial stability and security of its dividend payouts. The stock is trading at 19.5x 2013 EPS and 19.3x 2014 EPS.

UNS Energy

UNS Energy Corp (NYSE:UNS), an electric utility company servicing 630,000 customers across Arizona, achieved a total return of 42.1% over the past 12 months. Part of that total return was driven by high dividends, which currently yield 3.5% on a payout ratio of 64% of the current-year EPS estimate. The company has implemented 14 consecutive dividend increases and has achieved a compound annual growth in dividends of 14% since year 2000.

UNS Energy Corp (NYSE:UNS) follows a long-term dividend payout target of 60%-to-70% of net income, which means that future EPS growth could easily drive dividend growth. With this in mind, analysts forecast an EPS CAGR of 8% for the next five years, which is high relative to EPS growth rates of the company’s peers. Analyst estimates have seen recent upward revisions, with the current-year and 2014 EPS estimates revised upward by 5.4% and 3.2%, respectively, over the past three months.

In late April, the company reported strong earnings performance, with its diluted EPS surging 59% year-over-year. The company’s strengths include a constructive regulatory environment and strong operating cash flow that provide flexibility and reinforce dividend stability, strong track record of operating performance, and long-term growth opportunities. UNS Energy Corp (NYSE:UNS) is priced at 18.6x 2013 EPS estimate.

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