If Trump 2.0 rhymes with Trump 1.0, then this is an intriguing time to consider small-cap dividends. In 2016, smaller companies experienced a surge in the market following President Donald Trump’s election, driven by optimism about potential market impacts. However, this initial excitement eventually led to years of underperformance as reality set in, forcing investors to differentiate between winning and losing small-cap stocks.
Now, with Trump 2.0 in play, small caps initially soared after the second election victory, fueled by hopes of reduced regulations benefiting these companies. However, the market sentiment quickly shifted, leading to solid losses for small caps post-election.
Valuation Disparity:
The disparity in valuation between small caps (S&P 400 and S&P 600) and their large-cap counterparts 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
Stock Picker’s Market:
It is crucial to approach the small-cap market as a stock picker’s market. Not all small caps will benefit equally from the Trump 2.0 Trade, highlighting the need to identify potential winners and losers in this space.
High-Yield Small-Cap Stocks to Watch:
Here are five small-cap stocks with dividend yields ranging from 11.1% to 12.6%, most of which are overlooked by Wall Street:
1. Business Development Companies (BDCs):
These small caps are showing relative strength in the current market downturn, with a focus on business development companies. Despite the common belief that BDCs thrive on higher interest rates, moderate rate declines can lead to better loan origination.
- Cion Investment (CION):
- Yield: 12.6%
- Externally managed BDC with diversified portfolio
- Majority of deals in first-lien debt
- Floating-rate portfolio
- Strong performance and shareholder returns
- Oaktree Specialty Lending (OCSL):
- Yield: 11.7%
- Invests in various industries with a focus on software and services
- Recent dividend cut to a base-plus-supplemental system
- Shares trade at a discount to net asset value
2. Mortgage Real Estate Investment Trusts (mREITs):
mREITs, especially those dealing with residential mortgages, have shown relative strength amid falling mortgage rates and stock market fluctuations.
- New York Mortgage Trust (NYMT):
- Yield: 11.8%
- Invests in various mortgage products
- Strong relative strength and cheap valuation
- Dividend history and financial metrics to consider
In conclusion, the current market environment presents opportunities in high-yield small-cap stocks, particularly in BDCs and mREITs. Understanding the nuances of these sectors and conducting thorough research can help investors navigate the market and potentially identify lucrative investment opportunities. Unlocking the Potential of PennyMac Mortgage Investment Trust (PMT)
When it comes to specialty finance companies, PennyMac Mortgage Investment Trust (PMT) stands out as a key player in the market. With a focus on investing primarily in residential mortgage loans and mortgage-related assets, PMT offers investors a unique opportunity to tap into the housing market in a strategic way.
Here are some key points to consider when looking at PennyMac Mortgage Investment Trust:
- Steady Performance: Despite the market downturn, PMT has shown a positive uptick in earnings, making it a reliable investment option for those seeking steady returns.
- Dependable Dividends: While dividends in the mREIT sector can be unpredictable, PennyMac has shown a commitment to its shareholders by consistently paying out dividends, even increasing them since its IPO in 2009.
- Quality Over Quantity: Compared to its competitors, PennyMac Mortgage Investment Trust has maintained a higher level of quality in its investments, making it a more stable choice for investors looking for long-term growth.
Exploring the Potential of Ellington Financial (EFC)
Ellington Financial (EFC) offers a unique investment opportunity for those willing to take on a bit more risk. With a diverse portfolio that includes various real estate assets such as residential transition loans, commercial mortgage loans, and collateralized loan obligations (CLOs), Ellington Financial provides investors with exposure to different areas of the real estate market.
Here are some key points to consider when looking at Ellington Financial:
- Diverse Investment Portfolio: Ellington Financial’s diverse range of investments offers investors a chance to tap into different sectors of the real estate market, potentially leading to higher returns.
- Earnings Strength: With a reverse-mortgage arm called Longbridge driving earnings growth, Ellington Financial has shown resilience in the face of market challenges.
- Value Proposition: While the value proposition may have decreased slightly in recent years, Ellington Financial still offers potential value for investors looking for discounted opportunities.
The Dip in Mortgage Rates Has Put Pep in mREITs’ Step
The recent dip in mortgage rates has injected new energy into the mortgage real estate investment trust (mREIT) sector, creating opportunities for savvy investors to capitalize on market trends and potential growth.
In conclusion, PennyMac Mortgage Investment Trust and Ellington Financial offer unique opportunities for investors looking to diversify their portfolios and tap into the real estate market. While each comes with its own set of risks and rewards, both companies have shown resilience and potential for growth in the ever-changing financial landscape.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."