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Petmed Express Inc (PETS), American States Water Co (AWR): Should You Buy This 4% Yielding Small Cap Stock?

Petmed Express Inc (NASDAQ:PETS)Imagine a small-cap stock with a well-known brand name that pays a 4% dividend at recent prices. Consider, too, that this stock recently increased its dividend and has climbed 50% in price just since the beginning of 2013.

Although you might be tempted to call me crazy, one such stock does actually exist. Is this stock too good to be true? Or are there underlying risks investors need to first consider before gleefully buying shares?

Dial 1-800-PetMeds

Petmed Express Inc (NASDAQ:PETS) operates as a retailer of pet pharmaceutical products in the United States under the brand 1-800-Petmed Express Inc (NASDAQ:PETS)’s.

The stock has a $320 million market capitalization, and the company does approximately $230 million in sales per year.

Pet pharmaceuticals is an extremely competitive operating environment. The threat of larger retail competitors is a constant danger. Furthermore, as such a small company, Petmed Express Inc (NASDAQ:PETS)’s is fairly reliant on inexpensive advertising to keep leveraging its brand and expanding its footprint.  This explains why Petmed Express Inc (NASDAQ:PETS)’s goes through periods of very difficult bumps in the road.

Petmed Express Inc (NASDAQ:PETS)’s struggled in fiscal 2013, as sales fell 4.4% versus fiscal 2012. That being said, diluted earnings per share rose 7.5% from the prior year, thanks to the company’s focus on cost-cuts.

Fortunately for shareholders, the company righted the ship in the first quarter. Net sales rose nearly 8% and EPS jumped 22% versus the first quarter last year.

Moreover, shareholders got another reason for optimism when the company increased its dividend by 13%.

Small-caps with stronger track records

You may be concerned about Petmed Express Inc (NASDAQ:PETS)’s questionable growth in recent periods, and nobody could blame you. If you’re interested in small-cap stocks but desire companies on firmer financial footing, you’re still in luck.

This past May, American States Water Co (NYSE:AWR) said that its board of directors had approved a 14% dividend increase. The company’s new payout, $1.62 per share annualized, represents a 2.5% yield going forward.

American States Water Co (NYSE:AWR) is no stranger to providing its investors with healthy dividend raises. The company, which operates as a water and electric utility in California, represents the gold standard among dividend payers; American States Water Co (NYSE:AWR) has provided investors with 59 consecutive years of increases in its aggregate annual dividend, according to the company.

Clearly, utilities generally carry stable businesses, so there’s almost no reason to worry about American States Water Co (NYSE:AWR)’s dividend sustainability.

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