3 Undervalued Small Caps With High Yields to Buy Now

Interested in small caps and dividends? If so, Canadian Western Bank (TSX:CWB), Premium Brands Holdings Corp. (TSX:PBH), and Sleep Country Canada Holdings Inc. (TSX:ZZZ) are combinations of both.

| More on:
The Motley Fool

As Foolish investors know, dividend-paying stocks outperform non-dividend-paying stocks over the long term, and small-cap stocks have the highest growth rates on average. This means that investing in dividend-paying small-cap stocks can be a recipe for huge returns, so let’s take a look at three that you could buy today.

1. Canadian Western Bank

Canadian Western Bank (TSX:CWB) is one of the largest banking institutions in Canada’s four western provinces with over $22 billion in total assets.

At today’s levels, its stock trades at just 8.5 times fiscal 2016’s estimated earnings per share of $2.68 and only 7.9 times fiscal 2017’s estimated earnings per share of $2.86, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 12.9 and its industry average multiple of 13.1.

With the multiples above and its estimated 4.3% long-term earnings growth rate in mind, I think Canadian Western Bank’s stock could consistently command a fair multiple of at least 10, which would place its shares upwards of $26 by the conclusion of fiscal 2016 and upwards of $28 by the conclusion of fiscal 2017, representing upside of more than 14% and 23%, respectively, from today’s levels.

In addition, the company pays a quarterly dividend of $0.23 per share, or $0.92 per share annually, which gives its stock a yield of about 4.05%.

2. Premium Brands Holdings Corp.

Premium Brands Holdings Corp. (TSX:PBH) is one of the largest owners and operators of specialty food manufacturing and differentiated food distribution businesses in Canada and the United States.

At today’s levels, its stock trades at just 24.8 times fiscal 2015’s estimated earnings per share of $1.77 and only 20.4 times fiscal 2016’s estimated earnings per share of $2.15, both of which are inexpensive compared with its five-year average multiple of 44.7 and its industry average multiple of 33.7.

With the multiples above and its estimated 21.5% earnings growth rate in fiscal 2016 in mind, I think Premium Brands’ stock could consistently command a fair multiple of about 25, which would place its shares upwards of $53 by the conclusion of fiscal 2016, representing upside of more than 20% from today’s levels.

Additionally, the company pays a quarterly dividend of $0.345 per share, or $1.38 per share annually, which gives its stock a yield of about 3.1%.

3. Sleep Country Canada Holdings Inc.

Sleep Country Canada Holdings Inc. (TSX:ZZZ) is Canada’s leading retailer of mattresses and sleep accessories through its Sleep Country and Dormez-vous brands.

At today’s levels, its stock trades at just 15.6 times fiscal 2015’s estimated earnings per share of $1.09 and only 14.6 times fiscal 2016’s estimated earnings per share of $1.16, both of which are inexpensive compared with its industry average price-to-earnings multiple of 23.7 and its sector average multiple of 17.9. Five-year average multiples are not available for this stock, because it went public less than a year ago.

With the multiples above, its estimated 6.4% earnings growth rate in fiscal 2016, and the fact that it is the only publicly traded mattress company in Canada in mind, I think Sleep Country’s stock could consistently command a fair multiple of about 20, which would place its shares upwards of $23 by the conclusion of fiscal 2016, representing upside of more than 35% from today’s levels.

In addition, the company pays a quarterly dividend of $0.13 per share, or $0.52 per share annually, which gives its stock a yield of about 3.1%.

Does one of these small caps belong in your portfolio?

Canadian Western Bank, Premium Brands, and Sleep Country Canada are three of the best dividend-paying small-cap investment options in the market today. All Foolish investors should strongly consider establishing positions in one of them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »