Small Cap write on sticky notes isolated on Office Desk. Stock market concept
If Trump 2.0 rhymes with Trump 1.0, then this is an intriguing time to consider small cap dividends. Let me explain—and then we’ll highlight a handful of 11.1% to 12.6% dividend stocks.
In 2016, smaller companies popped for weeks amid largely sentiment over what President Donald Trump’s election would mean for the market broadly and small caps specifically. But that sentiment-related pop eventually turned into years of underperformance as theory became reality—and unfavorable conditions forced investors to stop betting on small caps as a group, and instead separate winners and losers.
Fast-forward to Trump 2.0. I wrote in December that small caps were soaring following Trump’s second electoral victory in hopes that reduced regulations will let these companies run free.
But shortly after that, it became clear the honeymoon was over.
Small Caps Sink
The valuation disparity between small caps (S&P 400 and S&P 600) and their large cap (S&P 500) peers is significant:
- S&P 500: 21.5 Forward P/E
- S&P 400: 15.6 Forward P/E
- S&P 600: 15.3 Forward P/E
That said we can’t just blindly buy. I warned back in that December piece that “it is going to be a stock picker’s market, especially in the small space.” That increasingly looks the case—the Trump 2.0 Trade probably won’t benefit all small caps equally, which means we need to separate winners from losers.
Right now, I have my eye on five small-cap stocks, most of which Wall Street largely ignores. The yields are electric, from 11.1% to 12.6%. Let’s dive into the dividend details.
2 Business Development Companies
These small caps are showing impressive “relative strength” in this current market downturn. A handful of business development companies (BDCs) in particular. It sounds counterintuitive—BDCs generally thrive on higher interest rates (as their loans tend to be floating-rate), and both shares and dividends can suffer if rates plunge. However, moderate rate declines aren’t necessarily a backbreaker, and can even lead to better loan origination.
CION Investment (CION, 12.6% yield) is an externally managed BDC with a portfolio of 103 companies spread fairly evenly across numerous industries, though it does have double-digit concentrations in business services and healthcare/pharmaceuticals. Most of its deals are done through first-lien debt (85%), with most of the rest in equity (14%), though it does have sprinklings of second-lien and unsecured debt. Meanwhile, 81% of the portfolio is floating-rate in nature.
Non-accruals as of its last report were a little high, at 1.85% of the total investment portfolio at fair value, and up from 1.36% in June. It warrants monitoring, but it’s not egregious, especially given Cion’s admittedly limited track record.
Cion is fairly young—it direct-listed in October 2021—but has outrun many of its BDC peers thanks to generally solid results so far. And in that time, it has also splashed shareholders with cash. CION not only pays out a substantial 36-cent quarterly dividend (11.8% yield), but also small supplemental and year-end special dividends, which in 2024 tacked on an additional 80 basis points to its yield.
It might sound odd, but the base-plus-supplemental system is becoming more commonplace among BDCs—if nothing else, the optics of issuing still-high regular dividends with additional upside (should results allow) are much better than being forced into dividend cuts through down cycles.
One last note on CION: Despite their total-return outperformance of the BDC industry, shares still trade at a 22% discount to net asset value (NAV).
Oaktree Specialty Lending (OCSL, 11.7% yield) is defying gravity right now—not just because it’s up in a down market, but also because it’s up despite cutting its dividend just a month ago.
OCSL currently invests in 136 companies across 20 industries, with an emphasis on software and services, as well as health care equipment and services. It predominantly deals in first-lien debt, though it also has second-lien, unsecured, equity, and even joint-venture investments. The lion’s share (88%) of debt investments are floating-rate, but not all.
Oaktree Specialty’s February report was chock full of interesting news.
The most dominant headline to be concerned with was a change to OCSL’s dividend, from a regular quarterly program to a base-plus-supplemental system.
But Oaktree’s new 40-cent regular payout (10% yield) and 7-cent supplemental for the most recent quarter (1.7% yield when annualized) still comes out to a 15% reduction from its previous 55-cent regular dividend.
But OCSL made two other announcements worth a little attention. For one, management injected $100 million of new equity capital, and it did so at a price equal to NAV, so it wasn’t dilutive to net asset value (NAV). The company also instituted a rolling 12-quarter lookback provision that could result in lower incentive fee expenses should the portfolio suffer losses. Speaking of NAV: OCSL shares currently trade at a 9% discount to net asset value.
3 Mortgage REITs
One of the clearest shows of relative strength has come from mortgage real estate investment trusts (mREITs), especially those that deal with residential mortgages.
That’s largely because mortgage rates have been falling alongside stocks—the 30-year rate climbed above 7% in January but has since retreated to the high 6% range. That’s good news for mREITs, as declining mortgage rates should revitalize purchase originations and refinancing activities.
Also helping some names in the space has been an increasing belief that potential economic weakness could force the Federal Reserve’s hand into quicker rate cuts, which in turn would be good news for more leveraged mREITs.
A few mREITs stick out right now:
New York Mortgage Trust (NYMT, 11.8%) invests in mortgages and other securitized products, including residential mortgage loans, agency residential mortgage-backed securities (RMBSs), non-agency RMBSs, structured multifamily investments and more. The nearly 12% yield is great. So is its relative strength of late (+13% since the February market peak). And so is its cheap valuation (65% of adjusted book value).
Not so great is the fact that its dividend is half of what it was three years ago, and that undepreciated earnings (a non-GAAP financial metric NYMT uses) haven’t covered the dividend over the same time span. But this mREIT still bears watching: It’s exiting JV assets that have hampered the business, and earnings are getting closer to covering the dividend.
PennyMac Mortgage Investment Trust (PMT, 11.1%) is a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets, such as mortgage servicing rights, agency MBSs, government-sponsored enterprise credit risk transfers and more.
Sure, the yield is a little less than NYMT (but still enormous), hasn’t been as exuberant during the market downturn (+4%), and the bargain proposition isn’t as deep (90% of book). But historically, this has been a higher-quality mREIT than New York Mortgage Trust.
Financial results have been more consistent, and the stock has been more productive. Also, while the dividend is (like many mREITs) not exactly set in stone, it has been more dependable than most—PennyMac is actually paying more than it did since its initial public offering in 2009. Compare that to NYMT, whose dividend is 70% thinner since then.
Ellington Financial’s (EFC, 11.1%) dividend history is even worse than NYMT, off more than 80% since its 2010 IPO. But those able to stomach the risk should at least keep their eye on it. Ellington invests in just about every kind of “paper” real estate one can think of.
It primarily deals in credit such as residential transition loans, residential and commercial mortgage loans, CMBSs and collateralized loan obligations (CLOs), but it also has lesser (and shrinking) dealings in agency MBS. It also boasts a reverse-mortgage arm called Longbridge that has helped drive earnings strength of late. Book value has remained solid.
Ellington did reduce the payout as recently as 2024, but dividend coverage is looking healthier. But the value proposition has winnowed—despite losing more than a quarter of its value over the past two years, recent strength has it trading pretty close to BV.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none