It’s been a banner year for TSX small caps.
The iShares S&P/TSX Small Cap Index ETF (TSX:XCS) is up 37.4% year-to-date, the ETF’s first year with positive returns since 2013. As we head into 2017, investors are asking themselves if small caps can maintain the momentum of this past year and deliver another banner performance.
While I can’t answer that, I can provide income investors with three small caps to own in 2017 that not only have upside capital appreciation potential, but they also have current dividend yields of 5% or more.
Picking only from small-cap stocks—market cap between $100 million and $1.5 billion—held in the XCS, I believe these three companies all have what it takes to perform in 2017.
Diversified Royalty Corp. (TSX:DIV)
In early September, I recommended Fool.ca readers forget about a certain Montreal-based builder of planes and trains and instead have a look at the Vancouver-based small-cap stock that invested in royalty-driven franchise businesses in Canada.
At the time, it was in the process of selling the trademarks and royalty rights related to the Franworks restaurant business for $90 million with many of the 82 restaurants in the royalty pool located in Alberta. That deal closed on November 28.
Now that the sale of the Franworks royalties has been completed, Diversified receives royalties from two groups: Mr. Lube and Sutton Group Realty. It expects to invest the $90 million in one or more well-managed, multi-location businesses and franchisors in North America.
With more than $80 million in the bank after the sale, it will have plenty to pay investors. Right now, DIV stock yields 8.7%. I expect its stock to take flight once management announces a new royalty acquisition.
Aimia Inc. (TSX:AIM)
Talk about a stock that’s been dead money in recent years.
The company behind Aeroplan and other loyalty rewards programs around the world, Aimia stock has delivered a whopping total return to shareholders in 2016 of 1.9%, which means after you back out the 9% yield, its stock actually declined by 7.1% in the past 12 months.
Why should you take a look at this dog with fleas, as Gordon Gekko would call it?
Well, if you’re an income investor, a 9% dividend yield is nothing to sneeze at. Of course, you don’t offer that kind of yield without there being a little extra risk involved. In Aimia’s case, its kryptonite is making money—it rarely does.
However, because it has significant depreciation and amortization costs, free cash flow becomes a more useful metric for understanding how its business is performing.
In the third quarter of 2016, Aimia’s free cash flow per share was $0.67—21.8% higher than a year earlier. It expects to generate between $190 million and $210 million in free cash flow for 2016, of which $122 million will go toward dividends.
With a free cash flow yield of 8.1%, you’re getting Aimia stock for a very reasonable price.
Callidus Capital Corp. (TSX:CBL)
Back in September, when it was up a measly 92% on the year, I said that despite its warts, income investors should be attracted to its 6% dividend yield.
What does Callidus Capital do?
It lends money to businesses that can’t get financing from traditional financial institutions. Needless to say, because the risk is ratcheted up, so too are its gross yields.
Over the course of the past year, Callidus Capital CEO Newton Glassman has undertaken a number of steps to create value for its shareholders, including buying back stock and accelerating the dividends it pays out to shareholders, while also strengthening its business model.
A year ago, Glassman believed that the company’s shares were extremely undervalued. Resisting calls to take the company private, shareholders were the beneficiaries of a strong year on the markets.
For those who’ve been on board since the beginning of 2016, you know that Callidus Capital stock was trading for less than $9—well below its April 2014 IPO price of $14. Today, after the big run up, it’s now trading more than four dollars above its IPO share price.
Having righted the ship, Callidus Capital has hired Goldman Sachs to take the company private. The process should be completed by the end of the second quarter in June 2017. The company is looking to get as much as possible for shareholders, so I can see a $22 go-private bid in the new year.
In the meantime, enjoy the 6.7% yield.
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 Will Ashworth has no position in any stocks mentioned.