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Small caps are a great place to find undiscovered dividend stocks.
There are some dividend stocks hidden in plain sight, dividend stocks that the market and the media don’t give must love to. This often happens because they aren’t large companies and so get passed over for bigger names. Yet lurking in these uninteresting names are some of the market’s most reliable high-yielding dividend stocks you can’t miss out on.
Sometimes these undiscovered dividend payers remain a secret because they are in sectors that investors aren’t interested in, or that the financial media doesn’t really understand.
That’s a shame, because each pay dividends that are generous, solid, and offer capital gains based on their business models. You should consider seeking these undiscovered dividend stocks out for more research.
Dividend Payer #1: AHT
Ashford Hospitality Trust (NYSE:AHT) is a hotel Real Estate Investment Trust, and is thus required to pay out 90% of its income to shareholders. Ashford owns 114 hotels with 22,667 rooms, and invests across segments and all levels of capital structure.
Few investors really understand the economics of the hotel industry, and that’s why Ashford is a great find. As a small-cap dividend stock, it is underfollowed. Yet
Ashford stock has outperformed its peer average in hotel REITS over every one to ten year period in the past ten years. It has also outperformed every benchmark in the 1, 3, and 5 year period, as well as since its 2003 IPO.
While other hotel REITs cancelled both common and preferred dividends during the financial crisis, Ashford maintained its preferred payments. While other hotel REITs struggled with debt maturities, Ashford was able to repeatedly refinance maturities and balances. This is all a testament to management’s ability to manage capital and remain a dividend stock for the long term.
Ashford also has the highest insider ownership, by far, of its peers. 18% of shares are held by insiders. The nearest competitor has only 4% held by insiders. Best of all, it pays a 4.5% dividend, a yield usually reserved for widows-and-orphan stocks, not dividend stocks in a sector with improving revenue and cash flow.
Ashford has done more and more investor road shows. I don’t think the stock will stay a hidden dividend stock for long.
Dividend Payer #2: RGC
Regal Cinemas (NYSE:RGC) is another undiscovered dividend stock, also overlooked because it isn’t a big mega-cap name. Its $3 billion market cap puts it in the small-cap arena and that’s not where dividend stocks are known to hide.
The other reason it is an overlooked dividend payer is because the movie business is not well understood by investors or the financial media, both of which mistakenly equate the risk of producing movies with the risk of merely exhibiting them.
Producing movies is a risky venture, because hundreds of millions can be spent on a product nobody consumes. However, a movie theater exhibits many movies, and this diversification is what makes the exhibition business a cash flow juggernaut, allowing to be a dividend stock.
Movie theaters chains draw down debt to build their houses, then rely on the constant stream of product from Hollywood to generate revenue. The movie revenue itself is good, but the concession revenue and margins are fantastic – with popcorn sold at ten time its purchase price. The result are chains are able to quickly cash flow, and then maintain that cash flow to become dividend stocks.
Prices also increase every year, often faster than the rate of inflation. Even in a year when movies do badly, movie theatres still generate robust cash flow. Regal pays a 4.5% dividend that has historically been only 50% of free cash flow.
With the hunt for dividend stocks taking on greater urgency amidst the Federal Reserve’s quantitative easing program, now is the time to jump in on movie theatres.
Dividend Payer #3: VNR
Vanguard Natural Resources, LLC (NYSE:VNR) is another small dividend stock that gets overlooked because of its tiny $2.5 billion market cap. Vanguard acquires and develops oil and natural gas properties. It owns 172 million barrels of proven reserves and interests in over 7,200 wells, across almost 800,000 acres.
Its vast reserves are what provides the cash flow for a hefty dividend stock payment. Those reserves are worth well over $15 billion, so for investors, it’s merely a matter of developing those wells so their value is realized over time, in the form of its 8.2% dividend.
Most people don’t realize that sitting on mass of stored value is what can make a company a solid dividend stock, and that’s why Vanguard often gets overlooked in favor of branded oil exploration companies like ExxonMobil (NYSE:XOM).
High-yield dividend payers like these don’t stay secret for long.
Lawrence Meyers owns shares of AHT.
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