Published on 13 Dec 2023 on Insider Monkey via Yahoo Finance
12 Best Micro-Cap Dividend Stocks To Buy Now
In this article, we discuss 12 best micro-cap dividend stocks to buy now. You can skip our detailed analysis of dividend stocks and their performance in the past, and go directly to read 5 Best Micro-Cap Dividend Stocks To Buy Now.
Microcap stocks refer to the shares of publicly traded companies that have a small market capitalization, typically between $50 million to $300 million. They are often considered riskier investments compared to larger companies because they tend to have lower liquidity, which means there might be fewer buyers and sellers for these stocks. As a result, microcap stocks can be more volatile and susceptible to significant price fluctuations. However, when selected thoughtfully, micro-cap businesses showcase substantial potential for growth that surpasses what's typically available with larger-cap counterparts. According to a report by Boston Partners, a Boston-based investment management company, research into the past indicates that value-oriented micro-cap funds have shown a trend of performing better than private equity over time. The report referred to data by Preqin, which showed that from the beginning of 1995 to June 2020, the US Private Equity Index grew by 716 percent. This growth, although impressive and higher than the S&P 500 Index's 255% increase during the same period, was overshadowed by the CRSP Equal Weighted Microcap Index, which saw growth of 740 percent. This comparison highlights the potential for better returns with actively managed micro-cap funds compared to private equity investments.
In one of its reports, Perritt Capital Management delved into the small firm effect, which refers to the tendency for stocks of smaller companies to outperform those of larger companies when considering the same level of risk. This effect was initially studied in 1978 by Rolf Banz during his doctoral dissertation at the University of Chicago. Banz organized NYSE-listed stocks by their market capitalization, creating five portfolios ranging from the largest to the smallest stocks on the Exchange. These portfolios were held for five-year periods, after which the stocks were re-sorted, and new portfolios were formed. He repeated this process from 1925 to 1975, analyzing the monthly returns of each portfolio. Over the 50-year analysis, the first four portfolios, which included all but the smallest NYSE firms, delivered returns in line with their risk levels, suggesting these portfolios were fairly priced or slightly overvalued by the market. These portfolios, collectively, yielded an average risk-adjusted monthly return of -0.06 percent (alpha) or -0.72 percent annually, indicating they underperformed relative to their systematic risk. Conversely, the portfolio holding the smallest NYSE companies stood out, providing investors with a significantly higher risk-adjusted excess return of 0.44 percent per month (alpha), nearly 6 percent annually. This anomaly suggests that smaller NYSE firms, despite their risk, delivered higher-than-expected returns, contrasting with the efficiency of pricing seen in the larger firms' portfolios.