Small firms need to use profits to expand their businesses, or so the thinking goes. Thus, investors typically associate dividends with large, cash-rich companies. But Eric Kuby and Peter Gottlieb, managers of North Star Dividend Fund (NSDVX), note that more than half of all U.S. stocks yielding at least 3% have market values of less than $1 billion. Plus, compared with their larger brethren, small-cap dividend payers are relatively cheap, they say.
Kuby and Gottlieb want stocks that are inexpensive and yield at least 3%. And they focus on the smallest of the small caps. At last report, 87% of North Star Dividend’s $56 million in assets was in micro-caps, which Morningstar defines as stocks with market caps of $250 million and less.
Beyond size considerations, the managers favor firms with ample free cash flow (cash profits left after capital outlays), little debt and an ability to lift their payouts. Kuby says that paying a dividend helps small firms avoid making overly aggressive moves, such as foolish takeovers. That and the emphasis on bargains in turn help temper the fund’s volatility. Over the past three years, North Star was 38% less jumpy than the small-company Russell 2000 index; at the same time, the fund beat the benchmark by an average of 3.1 percentage points per year. The biggest positions recently were Monmouth Real Estate Investment Corp., Orchids Paper Products and snowplow maker Douglas Dynamics.
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