5 Small-Cap Dividend Stocks Yielding Up To 12.6%

Trump 2.0 and the Intrigue of Small-Cap Dividends

In 2016, the election of Donald Trump ushered in a period of optimism for small-cap companies, as investors anticipated favorable conditions such as reduced regulations. This optimism led to a surge in small-cap performance initially, but this euphoria was short-lived. Over time, unfavorable market conditions and the realization that not all small caps would benefit equally from Trump’s policies led to underperformance.

Now, with Trump 2.0 on the horizon, there is a renewed interest in small-cap stocks, particularly those offering attractive dividend yields. The valuation gap between small caps and large caps is notable, with the S&P 500 trading at a forward P/E ratio of 21.5, compared to 15.6 for the S&P 400 and 15.3 for the S&P 600. However, it’s crucial for investors to adopt a selective approach, targeting high-quality companies with strong fundamentals rather than investing broadly in the sector.

Two Business Development Companies with Promising Yields

Investors looking for substantial income opportunities should consider business development companies (BDCs), which are known for their high dividend payouts. CION Investment (CION) stands out with an impressive 12.6% yield and a diverse portfolio of 103 companies across various industries, including notable concentrations in business services and healthcare. CION has consistently delivered strong performance, with a base dividend of 36 cents per share and additional supplemental and year-end special dividends. Despite its youth and minor issues like a higher non-accrual rate, CION remains an attractive option, trading at a 22% discount to its net asset value (NAV).

Another notable BDC is Oaktree Specialty Lending (OCSL), which offers an 11.7% yield. Despite a recent dividend reduction, OCSL has shown resilience, with its shares rising in a challenging market. The company’s diverse investment portfolio and focus on first-lien debt provide stability, while its recent equity injection and reduced incentive fees under a new lookback provision enhance its financial health. Trading at a 9% discount to NAV, OCSL presents a compelling value for income-focused investors.

Mortgage REITs: A Bright Spot in Challenging Markets

Mortgage real estate investment trusts (mREITs) have emerged as a beacon of relative strength, particularly those focused on residential mortgages. Declining mortgage rates have revitalized the sector, with the 30-year mortgage rate falling from above 7% to the high 6% range. This trend, coupled with the possibility of further rate cuts by the Federal Reserve, positions mREITs favorably for investors seeking high yields.

New York Mortgage Trust (NYMT) is a standout with an 11.8% yield and a diverse portfolio that includes residential mortgage loans and structured multifamily investments. Despite its yield being halved since 2020, NYMT’s recent relative strength and discounted valuation at 65% of adjusted book value make it a potential recovery play. However, investors should remain cautious about its ability to cover the dividend from earnings.

PennyMac Mortgage Investment Trust (PMT) offers an 11.1% yield and a reputation for consistency, with a track record of reliable dividends since its IPO in 2009. Its focus on residential mortgage loans and mortgage-related assets contributes to its stability. While its stock may not seem as undervalued as NYMT, its historical dependability makes it a safer choice for income-seeking investors.

Ellington Financial: A Riskier but Promising Option

Ellington Financial (EFC) rounds out the list of high-yield mREITs, offering an 11.1% yield. Despite a significant reduction in its dividend since its IPO, EFC has shown resilience through its diversified investment strategy, including a robust reverse-mortgage division that has bolstered recent earnings. However, its higher risk profile means investors should approach with caution, considering its limited discount to book value and historical volatility.

Conclusion: Strategic Selection in a Divided Market

The current market environment presents both challenges and opportunities for investors. While small caps, BDCs, and mREITs offer attractive yields, it is essential to be discerning. The performance of these investments will vary widely, making a stock picker’s approach crucial. By focusing on companies with strong fundamentals, diversified portfolios, and a history of consistent dividend payments, investors can navigate this complex landscape and unlock the potential of high-yield small-cap dividend stocks. Whether you’re considering BDCs like CION and OCSL or mREITs such as NYMT, PMT, or EFC, a well-informed, selective strategy is key to maximizing returns in the Trump 2.0 era.