What do you do when you have two small-cap dividend stocks with almost the identical market cap? You buy both of them. Hereâs why.
Leonâs Furniture (TSX: LNF) and North West Company (TSX: NWC) are two dividend stocks currently yielding 3.1% and 4.4%, respectively. Both are small-cap stocks, have a market cap of approximately $1.4 billion, and operate profitable retail businesses.
Itâs no secret to many investors that dividend stocks deliver better returns over the long haul than non-dividend-paying stocks.
According to the Globe and Mailâs Norm Rothery, if you’d bought an equal amount of all the dividend stocks in the TSX composite 16 years ago and re-balanced them every year, youâd have generated 10.2% compound annual growth compared to 7.5% over the same period if youâd bought the entire TSX composite index.
A 270-basis-point difference on a $10,000 investment over 16 years translates to an additional $15,500 return, all because of the dividend.
But not just any dividend
Many investment gurus suggest you avoid high-yielding stocks because theyâre often a sign of a weakening business, ultimately leading to a cut in or elimination of the quarterly or monthly dividend.
It makes sense. The stock price goes down and the yield goes up. So, how high is too high?
Well, according to Rothery, if you took all of the stocks yielding between 3% and 6.4% and equal-weighted them over the past 16 years, youâd have generated an average annual return of 11.2% — 370 basis points better than the entire TSX.
Interestingly, although stocks with reasonably high dividend yields outperformed, the highest-yielding stocks delivered just a 4.1% annual total return, lending credence to the expertsâ opinion that you donât want to go too high when it comes to dividend yields.
Leonâs Furniture and North West Company just happen to be members of TSX cohort between 3% and 6.4%, making them very attractive dividend stocks.
What about the actual businesses?
Iâm not suggesting that you buy both stocks sight unseen.
Youâve always got to do your due diligence no matter the investment, public or private, but if you look at the long-term returns of both stocks â Leonâs and North West have 10-year annualized total returns of 9.1% and 9.4% versus 4.8% for the TSX â itâs clear theyâve been winners for shareholders.
Howâs the future looking?
Well, youâre not going to see tremendous revenue growth from either company. However, if youâre looking for two small-cap dividend stocks that arenât going to keep you up all night worrying, Leonâs and North West are excellent bets.
North Westâs first-quarter results saw it increase operating earnings by 53% despite a 4% decrease in revenues. However, excluding one-time costs, adjusted earnings actually decreased by 12% in the quarter due to store closures in the Caribbean from hurricane damage.
North West does a good job controlling expenses, so the decrease in the quarterly profit shouldnât be too concerning to potential investors. More importantly, itâs increased its annual dividend for six years straight from $0.96 a share to $1.28 a share — a 33% increase over this period.
As for Leonâs, itâs done a good job of late getting customers in the door while also keeping a lid on costs, which has led to increases on both the top and bottom line in its most recent quarter.
Leonâs sells a lot of appliances in addition to furniture. With the exit of Sears Canada from the appliance market, it should continue to benefit from new business in this area.
Sustainable dividends are the key
The most important thing to remember here is that both companies donât have a problem sustaining their dividends, and you canât grow your quarterly dividend if you canât pay it.
Theyâre boring but reliable.
