Small-cap stocks are generally perceived riskier than larger-cap stocks, but they still sport their fair share of strategies with market-beating potential. Given that small-cap stocks are mainly growth-oriented, they have not been recognized as prominent dividend payers, as lion’s shares of these companies’ cash flows are channeled into business expansion. Therefore, income-focused investors have shied away from small-cap stocks as income plays.
However, in the small-cap universe there are some committed dividend payers who have paid dividends consistently over years and have raised them over extensive periods of time. Some of these dividend-paying equities may represent good candidates for income-centric retirement portfolios.
With this in mind, below is a selection of four dividend-paying equities that can provide dependable dividend income with potential for capital appreciation over time. These equities are selected based on the following criteria:
– Dividend yields of at least 3%, above the current 10-Year Treasury bond yield of 2.19%;
– Dividend growth above the current annual rate of inflation;
– Low variability of returns;
– Betas on par or below that of the broader market; and
– Capacity to sustain dividends through business cycles.
Essex Property Trust Inc (NYSE:ESS)
Essex Property Trust Inc (NYSE:ESS), a West-Coast-based multi-family residential REIT, has been named one of the REIT Elite members, blue chips among REITs, with a consistent earnings quality through different business cycles. The company boasts strong fundamentals, which support the case for long-term income investors. With 166 properties consisting of more than 34,000 residential apartments, this REIT is poised to benefit from a robust demand in the markets demonstrating solid population, employment, and income growth on the one hand and a constrained supply in major metropolitan areas on the other. The sector is generally attractive, as it is believed that apartment rents provide a good hedge against inflation risk. Amidst rising inflationary risks, the multi-family housing market shows new signs of revival, as suggested by the NMHC Quarterly Survey of Apartment Market Conditions (read more about it here).
The case for Essex Property Trust Inc (NYSE:ESS) in the longer run rests on its presence in markets, which have the highest forecasted rent growth through 2016. In fact, nearly two thirds of the company’s revenues come from these markets. One example is the San Jose market, which accounts for about 17.2% of total revenues and has a projected cumulative rent growth of 18.9% between 2013 and 2016. Testifying to its strong position in the multifamily REIT segment, this REIT is also a leader in terms of NOI growth. Its same-property NOI grew by 9.2% last year—the highest growth rate among its peers—, which may slow down to about 7%, still the fastest pace in its group. The company’s plan to boost occupancy in order to drive rent growth, to add value through redevelopment, to focus on acquisitions and property development in high-expected rent growth areas, and to maintain solid balance sheet, looks like a sound strategy. The REIT pays a dividend yield of 3.1% on a payout ratio of 64% of the 2013 FFO guidance midpoint.