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Search for value among smaller stocks yields three dividend payers

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

Puffy clouds crawling across the sky on a warm summer day. They bring back memories of youth and fishing along a small river in Alliston, Ont., just down the hill from my grandparents' house. The river was convenient but it yielded few keepers.

These days, I leave the fish in peace and hunt for good stocks instead.

I recently cast my line into the pool of small company stocks in an effort to land a few generous dividend payers that trade at modest earnings multiples.

All three factors have been shown to help returns. James O'Shaughnessy reported, in What Works on Wall Street, that small U.S. stocks (not including microcap stocks) outperformed large stocks by an average of 1.1 percentage points annually from 1927 through 2009. Stocks with high yields (in the top half of yielders) outperformed the market by 1.5 percentage points annually over the same period. Value stocks with low price-to-earnings ratios (in the bottom decile – or 10 per cent) fared the best and outperformed the market by five percentage points annually from 1964 through 2009.

The three factors are often related to one another. For instance, a stock with a low price-to-earnings ratio might have suffered from a recent price decline. The decline would have also reduced its size (as measured by market capitalization) and boosted its dividend yield – provided the dividend remained the same.

It is important to avoid being carried away by past studies of this nature when dealing with individual stocks. After all, each stock charts its own course and it may, or may not, be heavily influenced by its peers and the market more generally.

But, despite the uncertainties involved, I've found that fishing in the small-stock value segment of the market is usually quite productive.

Three Canadian companies that look promising based on the three measures are Rogers Sugar Inc., AGF Management Ltd. and High Liner Foods Inc. All have market capitalizations (shares outstanding times share price) near $575-million. That might be large to you and me but it is small in comparison to such stocks as the big Canadian banks. All three pay dividend yields of more than 3 per cent and have traded for less than 15 times earnings over the past four quarters.

Rogers Sugar Inc. (RSI) is the dominant supplier of refined sugar in Western Canada and has its headquarters in Vancouver. It recently agreed to buy L.B. Maple Treat Corp., which is a bottler and distributor of maple syrup with plants in Quebec and Vermont. Rogers Sugar trades at 11 times earnings and pays a sweet dividend yield of 5.9 per cent.

AGF Management Ltd. (AGF.B) makes its home in Toronto and offers a suite of wealth management products to investors and institutions. The company trades at 13 times earnings and pays a 4.4-per-cent dividend yield.

While the stock is up dramatically over the past year, income investors should be aware that it has disappointed in the past and slashed its dividend in 2015. But, one hopes, the bad news is now firmly in the company's rear-view mirror. (For what it's worth, I own the firm's shares.)

High Liner Foods Inc. (HLF) is based in Lunenburg, N.S., and is well known for its frozen seafood products. The firm handles the messy business of making fish sticks while also offering fancier fare to more discerning consumers. High Liner trades at 14 times earnings and pays a 3.2-per-cent dividend yield. It has a pleasing habit of boosting its dividend and has done so on numerous occasions since 2008.

With a little luck, the three will provide a nice bounty to investors as they while away their time waiting for the fish to bite.

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