GenerousDistributions from Small-Cap Stocks with Exceptional Yields Reaching up to 19%
MFA Financial (MFA) is expected to have lower distributable earnings this year, but the dividend is anticipated to outpace them until 2026. This trend is not unique to MFA, as other small cap dividend payers such as New Mountain Finance (NMFC) and BlackRock TCP Capital (TCPC) are also offering attractive yields.
MFA, a player in the residential mortgage sector, has massively outperformed the mREIT industry throughout its publicly traded life. However, shareholders should expect peaks and valleys. In Q2, the company added one small loan to the non-accrual list, bringing non-accruals to 2.2% of the total portfolio on a cost basis. Despite this, Lima One, MFA's subsidiary, saw Q2 origination, servicing, and other fees increase by 13% QoQ, and added 15 loan officers during the quarter.
Kayne Anderson BDC (KBDC), another small cap BDC, operates in the middle-market and has a 12.6% yield. KBDC targets companies with between $10 million and $75 million in EBITDA and is concentrated in stable industries. The company began operations in 2021 and went public in 2024. During Q2, one small loan was added to KBDC's non-accrual list, but NAV declined by just less than 1% for the company during the same period.
NMFC, with a 12.1% yield, deals in U.S. upper-middle-market businesses backed by private equity sponsors. The company's portfolio is 124 companies wide and uses a "defensive growth" strategy. Despite NMFC's high yield, its shares are down about 3% due to a decline in NAV.
BlackRock TCP Capital (TCPC), a small cap dividend payer with a 15.7% yield, invests in more than 150 companies across 20 industries, with a focus on first-lien debt. TCPC is currently restructuring deals amid portfolio credit issues.
Small companies are implementing AI tools faster than their larger competitors, offering opportunities to explore high dividend yield markets. Small companies are also expected to see sales increase while headcounts remain relatively flat.
Armour Residential REIT (ARR), primarily investing in fixed-rate "agency" residential MBSs issued or guaranteed by government-sponsored entities, trades at about 90% of book and just over 4 times 2026 core EPS estimates. However, ARR has a history of dividend cuts, having cut its payout seven times since 2015.
Mach Natural Resources LP (MNR) operates in the Anadarko Basin and has additional assets in the Green River basin, expanding its reach to the San Juan and Permian basins. MNR trades at roughly 3.5 times this year's EBITDAX estimates, which is less than half of the average among comparable MLPs.
The S&P SmallCap 600 sector is currently the cheapest on the board, with a P/E ratio of 15.6. This could indicate a promising market for small cap dividend payers like MFA, KBDC, NMFC, and TCPC.
Small cap dividend payers offer attractive yields and are adopting AI tools faster than their larger counterparts. However, investors should be aware of potential risks such as dividend cuts and portfolio credit issues. As always, thorough research and careful consideration are key when making investment decisions.
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