3 Small Stocks with 7%-Plus Dividends

James Brumley's picture

Friday, October 14, 2011 - 1:00pm

by James Brumley

It's been said the best gifts sometimes come in the smallest packages. The same is often true for dividend-seekers -- some small cap stocks can provide a reliable and sizeable source of income that's quite uncharacteristic for a company of their size. And, aside from surprisingly large dividend payouts, a few of these companies also offer growth prospects their large-cap counterparts simply can't. No, there aren't a multitude of these stocks, but there are enough for those who seek them.

Here's a closer look at three high-yield small-cap stocks income investors may want to consider.

1. PDL BioPharma Inc. (Nasdaq: PDLI)
Yield: 11%

When investors think of the average biotech stock, the typical vision usually looks nothing like what PDL BioPharma is. In fact, the nature of the business model has little to do with biotech, and everything to do with income.

PDL BioPharma first and foremost seeks royalty payments for use of its patented antibody technology. While it developed the therapeutic monoclonal antibody platform that has become the key source of revenue, it's more interested in letting other biopharma developers "lease" the know-how. And they have. Genentech/Roche's drugs, Avastin (for metastatic colorectal cancer), Herceptin (breast cancer), and Lucentis (macular degeneration), along with Elan (NYSE: ELN)/Biogen Idec's (Nasdaq: BIIB) Tysabri (multiple sclerosis) are all produced using PDL BioPharma's antibody technology.

The model seems to be working, too. Since 2004, the company's revenue as well as operating profits have averaged double-digit growth, to $335 million last year, thanks to increasing royalty payments from pharmaceutical companies.

A recent analyst downgrade stemmed from concerns that many of its current royalty deals will expire in 2015, which is a legitimate worry. However, other drugs built on the same platform are in the pipeline. Elan and Johnson & Johnson's (NYSE: JNJ) bapineuzumab (for the treatment of Alzheimer's), for example, is one of them, and it's currently in Phase III testing. More drugs could -- and likely will -- be added to the royalty payment stream between now and 2015.

At its recent price of $5.37 per share, PDL carries an enticing yield approaching 11%. The company has recently committed to a regular "set" quarterly dividend rather than special dividends, which fluctuate. Having been profitable for quite some time now, with net margins around 35%, making those payments should be no problem.

2. Medallion Financial Corp. (Nasdaq: TAXI)
Yield: 7%

While the nature of PDL BioPharma's business is unique, Medallion Financial's is almost unheard of. This $175 million company makes loans to New York City cab owners and cab companies to facilitate the purchase of the "medallion" required to legally operate a taxi in the city. It's a stunningly important business too, because these medallions can cost as much as $700,000 each.

Yes, you read that right -- it can take well more than half a million dollars to break into New York's taxi business, and that's assuming one of the medallions is available. See, the city only allows so many of them to be issued at any given time.

There are two certainties here working in Medallion Financial's favor:

  • New York City's taxi cab industry isn't going anywhere
     
  • Most cab drivers, and even cab companies, can't shell out $700,000 to get started

The solution is a medallion loan, which commands a relatively high price, given today's interest-rate environment. While the typical medallion loan rate fell from 7% to 6% when all rates began to be lowered in 2008, that's still a much higher rate than other consumers are finding for other loan types. That's good news for Medallion shareholders, though, as it leads to a dividend yield of about 7%.

3. BGC Partners Inc. (Nasdaq: BGCP)
Yield: 10%

Finally, consider BGC Partners Inc. -- an $839 million investment bank and broker with a stock sporting a solid dividend yield of 10%. This dividend has been increasing on a regular basis since early 2010, and is backed up by increasing revenue and earnings since 2006.

There's nothing particularly unique about the company. It's a middleman within the financial world, able to raise funds for corporations, servicing retail brokerage customers through its 1,700 brokers and catering to the higher-level needs of its institutional clients. All are things its competitors do as well, however.

Where BGC Partners stands out aside from the strong dividend yield is in the execution of its business plan. The financial company grew revenue in 2008 when few other companies in the sector could. And though it dipped into the red ink in 2009 to the tune of $0.28 per share, it made it back into the black the next year and is on pace for record-breaking earnings of $0.77 per share this year.

In other words, the dividend is pretty well protected.

Risks to Consider: While dividends for all companies including these three generally reflect the strength of the underlying business, there's always a chance the policy makers for BGC Partners, PDL BioPharma and Medallion Financial could dial back the payout. That's very unlikely in these three cases though, because the companies were largely built from the ground up to be dividend payers.

Action to Take --> Of the three, Medallion Financial may be the most reliable payer, which explains the lower dividend yield. As for the other two, the yields are about the same, as are the growth prospects. This may be a case where -- if you were just looking for one new addition to your portfolio -- it may pays to split the difference and do two half-positions from two totally different industries.

James Brumley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.