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Assuming the Federal Reserve keeps its planned path of raising interest rates further in 2016, it should push the U.S. dollar even higher relative to other currencies. A strong dollar is bad for multinational corporations, but it’s great for companies that operate almost exclusively in the U.S.
The companies that tend to generate most of their money from within the U.S. are small-cap stocks. However, small caps can be a bit more volatile than large caps.
A great way to reduce some of this volatility is with dividends. However, there are still plenty of dividends that aren’t “high” but are growing, and are ultimately being overlooked because they are in the small-cap space.
With the strong dollar and the potential volatility among higher-yielding stocks, here are the three best small-cap dividend stocks to consider in 2016:
1. John Wiley & Sons (NYSE: JW-A)
John Wiley & Sons, a small-cap textbook company with just a $2.5 billion market cap, tends to be overlooked. However, it’s paying a 2.6% dividend yield – which is only a 40% payout of earnings – and it’s upped its dividend for 21 straight years.
It’s also more than just a textbook company. It has a strong digital presence in the education business and has shown the ability to pivot over the years. It’s now positioning itself in the growing online education course market. This comes thanks to its acquisition of Deltak, which works with universities to build online degree programs.
John Wiley & Sons’ core business is the research segment, which generates about 75% of its operating profits. This business sells journals to universities. The beauty of this segment is that the profitability is strong and consistent, thanks to limited competition and high renewal rates by customers. The average contract is roughly seven years.
2. Brocade Communications Systems (NASDAQ: BRCD)
Brocade is a $3.6 billion market cap provider of storage area networking products. It’s also a relative newcomer to the dividend world. It just started paying a dividend within the last year and is offering a 2.1% yield.
Look for Brocade to go on the offensive in 2016 when it comes to growth. It has a strong balance sheet and a lot of cash. It already dominates the storage networking market despite its relatively small size. It owns nearly three-quarters of the fiber channel storage area network market.
Brocade is also a cheap stock. It’s trading at just under 8.5 times next year’s earnings estimates. Meanwhile, it’s churning out double-digit returns on equity and invested capital.
3. ArcBest Corp. (NASDAQ: ARCB)
ArcBest is a provider of freight transportation services and logistics solutions. It’s the smallest name on our list, with a $550 million market cap. It’s offering a 1.5% dividend yield and has paid a dividend for 16 years now. It’s paying out just 16% of its earnings as dividends.
However, shares have been hit hard and are down 50% for the year. The stock is trading at under 9 times next year’s earnings estimates. The balance sheet is strong with less than a 40% debt-to-equity ratio, and it has 50% of its market cap covered by cash holdings.
The worry has been that a decline in retail demand and the slumping energy market will keep demand for trucking at bay. That has happened to some degree, but ArcBest is seeing margin improvement as it’s worked on efficiency over the last year – including letting lower-margin contracts roll off without renewal.
Going forward, the less-than-truckload industry that ArcBest specializes in should see pricing power, given the limited capacity and what looks to be more rational rate setting by peers.
The Small-Cap Skinny
Finding underrated small caps can be tricky. These stocks are not well followed by the media or Wall Street, and as a result can be more volatile.
However, having a solid dividend helps. The three stocks above are solid small-cap stocks with healthy dividends, and they should prove to be strong plays on the strong U.S. dollar in 2016.
(For a collection of more of our favorite high-yielding dividend stocks, click here.)