When it comes to dividend payers, investors generally prefer large-cap stocks over their smaller counterparts. Large businesses with strong financials and solid revenue streams seem like a logical and typically safer choice for most investors. However, it may also cause them to miss out on great opportunities that might be flying under their radar due to smaller market capitalization.
One prime example is MCAN Mortgage (TSX: MKP), a powerful dividend pick in the small-cap category.
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The company
MCAN Mortgage or MCAN Financial (the rebranded version of the company) started out as a mortgage lender, and while that is still its core business, the model has expanded. MCAN Financial has three business streams now: MCAN Home for mortgages, MCAN Wealth, which offers Guaranteed Investment Certificates (GICs), and MCAN Financial, which assists investors with real estate investments.
The three complementary business streams have allowed the company decent financial growth. Revenue grew from $100 million to around $123 million between 2021 and 2023, and net revenue increased by over 20% for the period. The mortgage portfolio has experienced more substantial growth, about 149% between 2019 and the last quarter.
The return potential
The stock is not only a solid pick from a capital-appreciation perspective but also a good pick in this regard. There is relatively little capital appreciation — about 17% in the last 10 years, but that’s not its primary attraction; the dividends are. If we include them in the last 10 year’s returns, the number jumps to 175%, a much more generous return than many decent growth stocks.
Part of this is because of the many special dividends the company has paid over in the last few years. But even if we remove them from the equation, the dividend history and other variables are attractive.
The company has been steadily growing its payouts for the last five years at least, and the dividend growth is very conservative. So, it’s reasonable to assume that the company will be able to maintain it for a relatively long time.
The second factor endorsing this notion is the payout ratio of 68%. It hasn’t crossed the 100% threshold even once in the last decade, indicating a stable financial history backing its generous 8.8% yield. At this rate, you can generate a passive income of about $220 a month from your Tax-Free Savings Account (TFSA) with roughly $30,000 invested in the company.
Foolish takeaway
While the dividends are reason enough to consider this company, the current undervalued nature of the stock might be the finishing stroke. It’s trading at a price-to-earnings ratio of just 7.8, and it’s still slightly below its target price of $18 per share.
