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

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.

Otter Tail

Otter Tail Corporation (NASDAQ:OTTR), a diversified company including an electric utility and infrastructure businesses, which include manufacturing, construction and plastics, achieved a total return of 42.5% over the past 12 months. Aside from price appreciation, part of that gain was also attributed to dividends. The company pays a dividend yield of 4.0% on a payout ratio of 84% of its current-year EPS estimate. Otter Tail Corporation (NASDAQ:OTTR) has paid quarterly dividends without interruption since 1938. The company projects it will maintain its dividend at $1.19 annually in 2013, while its EPS is expected to increase by between 2.4% and 22.7% this year.

The company’s strength is a good balance between solid cash flow generation from strong and stable regulated electric operations and potential for robust earnings growth from manufacturing and infrastructure operations. The firm’s another strong attribute is share ownership by Bill Gates’ investment arm, Cascade Investment LLC, which is reported to have a 9.56% stake, as presented for the period ending February 15, 2013, in Otter Tail Corporation (NASDAQ:OTTR)’s 2013 Proxy Statement.

PNM Resources

PNM Resources Inc (NYSE:PNM), an energy holding company providing electricity to more than 738,000 homes and businesses in New Mexico and Texas, achieved a total return of 31.0% over the past 12 months. PNM is also a regulated electric utility. The company pays a dividend yield of 2.9% on a payout ratio of 48% of the current-year EPS estimate. The company almost halved its payout in 2008; however, since it has increased its quarterly dividend cumulatively by 32%. Last February, the company hiked its dividend by 14%. PNM is saying it expects to produce “above average dividend growth” in the future, as it targets a long-term payout ratio of between 50% and 60%.

A continued EPS expansion will support future dividend growth, as the company sees 2013 EPS up 4.6%, based on its guidance midpoint. Analysts are relatively positive about the company’s long-term prospects, forecasting a long-term EPS CAGR of 6.2% for the next five years. In the previous quarter, PNM Resources Inc (NYSE:PNM)’s quarterly EPS growth benefited from a robust expansion of Texas’ economy, lower maintenance costs, and expanding load and rate increases. PNM Resources Inc (NYSE:PNM) is priced at 17x its 2013 EPS estimate. Billionaire Mario Gabelli has a large position in PNM; see Gabelli’s top picks.

Final Thoughts

It’s no secret that at Insider Monkey, we focus on the best small-cap picks of the best hedge fund managers. Through this research, we’ve shown that some of the smaller, underrated companies are under covered on Wall Street, and thus, can provide the best opportunity for high returns. One area within this space that often gets no attention is dividend stocks, and income-payers like PNM Resources, Otter Tail, UNS Energy Corp (NYSE:UNS), American States Water Co (NYSE:AWR) and American Realty Capital Properties Inc (NASDAQ:ARCP) have momentum to boot.

Disclosure: none

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