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These Small Caps Pay Big Dividends

Thursday - 7/18/2013, 2:44pm  ET

Small cap stocks have been outperforming their large cap rivals. As Goldman Sachs notes (via Business Insider), the Russell 2000 Index has outperformed the S&P 500 by nearly double in just the last two months.

But with that return comes risk. Small caps often have more concentrated business models than their larger rivals, putting them at greater risk for an economic downturn or shifting business landscape.

Nevertheless, small caps can be a great way to play a bull market, particularly when the stocks in question offer attractive dividends. IAMGOLD , Nutrisystem , and Costamare are all small caps that pay big dividends.

IAMGOLD is a small gold miner

Like most gold miners, IAMGOLD has struggled in recent months. Over the last year, shares are down more than 60%, giving the miner a present market cap of just $1.64 billion.

Still, the company pays a $0.12 dividend, meaning that IAMGOLD yields an incredibly attractive 5.75%. But can the company continue to pay that dividend? If the price of gold continues to tumble, yield-hungry investors could regret buying shares.

Last quarter, the company said its total cash costs per ounce of gold were just $787. Management admitted that its facing cost pressures, but insisted that its working to counteract those pressures with cost-cutting measures of its own.

IAMGOLD's current payout ratio stands at about 41%. This compares very favorably to larger dividend stocks like Coca-Cola (55%) and AT&T (135%). But as IAMGOLD is a gold miner, that could rapidly change depending on the price of gold.

For the year, the company guided consolidated total all-in sustaining cost guidance of $1200-1300 per ounce. This guidance could prove to be too conservative, given that IAMGOLD has embarked on an aggressive, $100 million cost reduction program. However, if gold prices continue to fall, investors might expect IAMGOLD to cut the dividend.

Last quarter, the miner reported operating cash flow per share of $0.31. Yet, this was when the company was selling gold for over $1600 per ounce. With current spot gold prices just under $1300 (right near the company's cost guidance), investors should expect significantly lower cash flows when the company reports earnings August 12. Unless gold prices rebound, or IAMGOLD's cost cutting program is highly effective, it doesn't seem likely that the company will continue to payout such a tremendous dividend.

Yet, if investors are bullish on gold, IAMGOLD could be an attractive investment. It should do well in an environment of higher gold prices, and the company pays its investors to hold their shares.

Nutrisystem is a weight loss company in the midst of a turnaround

If you're familiar with Nutrisystem, it’s probably from their commercials. The company sells pre-packaged meals aimed at helping people lose weight.

Over the last five years, the stock has performed terribly, losing almost a quarter of its value. Right now, the company maintains that it’s in the middle of a turnaround. Nutrisystem hired a new CEO last fall.

As part of the turnaround, the company has struck a deal with Wal-Mart to sell 5-day starter kits. Nutrisystem has said the deal has been a great success -- it has expanded the program from 500 stores to 2,000.

From a financial standpoint, the company’s dividend is crucial. With a $0.175 payout, the stock currently yields over 6%. Management has said that it understands the importance of the dividend, and remains committed to maintaining it during the company’s turnaround.

Still, Nutrisystem's payout ratio stands at a staggering 1,750%. Last quarter, the company generated $22.4 million in cash flow from operating activities, invested about 7% in capital expenditures, and paid out 21% in dividends. The rest went largely to building up its balance sheet. As long as Nutrisystem remains profitable, given management's insistence on maintaining the dividend, investors should expect a solid payout.

But if Nutrisystem's turnaround goes awry, based on how much cash is going towards the dividend, the company likely won't be able to keep paying.

Moreover, Nutrisystem is presently trading at an aggressive valuation -- its price-to-earnings ratio stands at over 300, more than 15 times the broader S&P 500 index.

Still, Nutrisystem’s core customer -- the obese -- is one demographic that (unfortunately) isn't going away. With its present valuation, Nutrisystem is definitely an aggressive play, but a 6% yield is nothing to laugh at.

Costamare is a Greek shipping company

Although Costamare’s headquarters are in Athens, the Greek economy has little effect on the company. Costamare is a global shipping company with 57 containerships.

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