Smaller Stocks For Income Investors

7/12/2010


The thought of small and midsized stocks typically conjures up images of aggressive growth and high risk. Yet even in this space, investors can find dividend plays that serve up steady income — along with a generous dose of operating momentum.

In the table below, we present six small wonders, stocks with market capitalizations of less than $7 billion, yields of at least 1%, and excellent growth potential. Three of the stocks are recommended in our sister publication Upside, which focuses on small and midcap stocks. Two of our favorites are reviewed below:

Del Monte Foods ($14; DLM), a maker of food and pet products, sustains its investors in part with a healthy dose of income. Del Monte dished out an 80% dividend hike last month, raising the quarterly payout to $0.09 per share, payable Aug. 5. The stock yields 2.5%, and its modest 27% payout ratio suggests an ability to further boost the dividend.

The stock enjoys rising earnings estimates (in the past month, all 10 analysts following the stock have raised their earnings projections for the current fiscal year), superior stock-price performance (up 28% this year), and an attractive valuation (shares trade at 11 times trailing earnings, 21% below the five-year average). Del Monte is a Buy in our Upside newsletter.


Lubrizol’s ($79; LZ) dividend growth has kept pace with sales over the last three years, with both rising at an annualized rate of 6%. In late June, management expanded a share-repurchase program to cover up to 7.2 million shares, enough to shrink the share count by 10%. That financial flexibility springs in part from the generation of nearly $10 per share in free cash flow over the past year.

A producer of additives used in engine oil, gasoline, drugs, and specialty materials, Lubrizol earns above-average ranks for all six Quadrix® categories and an Overall score of 99. The stock, yielding 1.8%, is a Focus List Buy.

SIX SMALL WONDERS
– 3-Year Annualized Growth –
– Est. EPS Growth –
Company (Price; Ticker)
Market
Value
($Mil.)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
Dividends
(%)
Sales
(%)
EPS
(%)
Curr.
Year
(%)
Next
5 Yrs.
(Annual.)
(%)
Advice
Cato ($21; CATO)
624
0.74
3.4
40
14
1
8
18
10
Upside Buy
Del Monte Foods ($14; DLM)
2,985
0.36
2.5
27
6
3
24
8
11
Upside
Best Buy
Lubrizol ($79; LZ)
5,529
1.44
1.8
16
6
6
39
15
NA
Focus
List Buy
Meadowbrook Insurance
($8; MIG)
460
0.12
1.4
13
NM
27
8
8
NA
Upside
Best Buy
Ross Stores ($55; ROST)
6,685
0.64
1.2
16
36
9
31
19
14
Focus
List Buy †
Sigma-Aldrich ($50; SIAL)
6,140
0.64
1.3
22
11
6
13
11
10
Long-Term
Buy
† Also qualifies as a Long-Term Buy.      NM Not Meaningful because company didn’t pay a dividend three years ago.     
NA Not Available.

 


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