Boost Your Returns with These Small-Caps

By George Leong

For most investors, the past year was about the search for higher-risk assets with the potential for achieving higher returns. This desire helped to propel the NASDAQ and Russell 2000 to returns in excess of 30%, while dividend paying stocks lagged in performance.

Now as we move along in 2014, we could see buying shift to more conservative stocks that pay a dividend to investors. The shift to these stocks could accelerate as comparative bond yields rise, making income investors choose between bonds and dividend stocks.

As an investment strategy, you can consider buying the large-cap dividend plays, such as General Electric Company (NYSE/GE) or The Proctor & Gamble Company PG.

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But while buying large-cap blue chips always makes sense to your overall portfolio strategy, you can increase your portfolio’s overall potential returns by adding small-cap dividend stocks. By doing so, you can usually add in higher capital appreciation potential.

And while there are numerous small-cap dividend plays in the financial and industrial sectors from which to select, I’d like to highlight a couple above-average stocks that you may want to examine further. As I said, these smaller companies offer dividends and higher capital appreciation potential.

In the area of investment management, a mid-cap company that looks like it may make a good addition to your portfolio is Och-Ziff Capital Management Group LLC OZM, which has a strong dividend yield of 6.7%. The stock has also advanced 61% to shareholders over the past 52 weeks; the S&P 500 returned just 25%. In the third quarter, Och-Ziff managed to beat the Thomson Financial consensus estimate by $0.07, reporting $0.27 per diluted share. Revenues are estimated to grow at 25.8% in 2013, according to Thomson Financial.

Another investment play to consider is Fortress Investment Group LLC FIG, which has been on a steady rise on the charts since June 2012. The company has about $55.0 billion in assets under management. In addition, Fortress pays out dividends of $0.24 annually, for a yield of 3.2%.

Och-Ziff and Fortress are examples of two small dividend plays that offer alternatives to large-cap dividend stocks and could be added to increase your overall portfolio return.

When searching for potential dividend plays, look at the stock’s beta versus the S&P 500 as an indicator of the potential upside gains. Betas in excess of 1.0 imply that those stocks offer higher capital appreciation compared to the S&P 500. For example, a stock with a beta of 1.5 could, in theory, move 50% higher when the index advances higher. This is especially true in a rising bull market, such as the one we’ve been witnessing for the past four-plus years.

At the end of the day, you should always look at adding dividend stocks with higher return potential as a boost to your overall portfolio.

This article Boost Your Returns with These Small-Caps was originally published at Daily Gains Letter