When they look for income, many investors turn to dividend-paying giants, such as Exxon Mobil or Procter & Gamble. Those stocks raise their dividends almost every year—and they have proven relatively resilient during recessions.
But in your search for steady payouts, don’t forget to consider less well-known small stocks. Plenty of small stocks currently pay dividend yields of more than 3%, a rich payout at a time when money markets yield less than 1%.
Over long periods, such steady small stocks have outperformed large ones. More importantly, small stocks can help to diversify a portfolio, sometimes rising when the blue chips of the S&P 500 are falling.
To be sure, small stocks can be risky. Many tiny businesses are shaky operations that can be clobbered during recessions. But by sticking with stocks that have long track records of paying dividends, you can avoid the worst risk. Companies that can afford to pay dividends tend to be mature businesses with steady profits.
For reliable results, consider utilities. While their sales may drop slightly during the recession, companies that produce power and energy should continue to report relatively steady earnings and dividends. A sound choice is AGL Resources, an Atlanta-based provider of natural gas with a dividend yield of 6.3%. The company builds and maintains pipelines in Florida, Georgia, and Tennessee.
Another solid dividend payer is Lincoln Electric Holdings, a maker of welding equipment, which yields 2.9%. The company should remain solidly profitable because customers use the equipment to repair factories and power plants, work that must continue even when the economy is in a slump.
Mutual fund investors should consider Allianz Small-Cap Value Fund. Focusing on dividend-payers, the fund returned 8.4% annually during the past decade, outdoing the S&P 500 by 9.8 percentage points annually. Portfolio manager Paul Magnuson takes a variety of steps to limit risk. He only takes profitable companies with sound balance sheets. In addition, Magnuson stays broadly diversified, never putting more than 1.5% of assets in any one stock.
This cautionary approach has enabled the fund to shine during downturns. When stocks slipped in 2000 and 2001, Allianz stayed in the black. Last year, the fund outdid the S&P 500 by more than 10 percentage points. Holdings should include such solid companies as Owens & Minor, a distributor of medical supplies, including needles and disposable gloves. Demand remains strong for such staples. The company pays a dividend yield of 2.8%.
Another low-risk choice is Royce Total Return Fund. During bull markets, the fund sometimes lags the overall market. But portfolio manager Charles Royce compensates for his slow periods by outperforming the benchmarks in market downturns. The fund returned 6.2% annually during the past 10 years.
Royce favors companies with strong balance sheets and the ability to survive economic downturns. To hold down risk, Royce stays broadly diversified. The fund holds 400 dividend stocks, rarely putting more than 1% of assets in any one name.
A big Royce holding is Wolverine World, the maker of footwear under brands such as Hush Puppies and Wolverine. The stock yields 2.6%.
Investors considering foreign stocks should try WisdomTree International SmallCap Dividend Fund, which outdid overseas benchmarks last year. The fund holds a cross section of dividend payers. Whether you are investing in small stocks at home or aboard, you may be able to achieve steadier results by sticking with solid dividend payers.