Top 3 Small-Cap Value Stocks for Dividend Investing

Investors looking for high dividend yields will likely focus on large-cap stocks. But small-caps can be worthwhile dividend investments as well.

The Russell 2000 is the world’s most well-known index of small-cap stocks, which generally have market capitalizations below $2 billion. Investors typically associate small-cap stocks with growth. And while this reputation is deserved, there are also small-caps that pay dividends to shareholders.

These three small caps have low valuations and long-term growth potential, in addition to their dividends.

1. Stepan Co. (SCL)

Stepan Co. SCL was founded in 1932 and, at the outset, it sold only one product: a chemical to keep dust down on Illinois’ country roads. Since that time, it has grown to manufacture basic and intermediate chemicals, with surfactants making up most of its revenue.

Stepan is also a Dividend King, having increased its payout for 57 consecutive years.

Stepan posted fourth quarter and full-year earnings on February 19, 2025, and results were mixed once again. Revenue was down 1.2% year on year to $526 million, but did beat estimates by almost $5 million. Adjusted earnings per share came to 12 cents. Global sales volume was off 1% year over year as double-digit growth in surfactants was offset by demand weakness in polymers. Surfactants were up 3% year over year in Q4 to $379 million.

The company managed to generate about $13 million in pre-tax cost savings during the quarter, and about $48 million for the full year. Cash from operations came to $68 million during the quarter, while free cash flow was $32 million. EBITDA for the year was $187 million on an adjusted basis.

We are forecasting a five-year average earnings-per-share growth rate of 15%, consisting of highly-volatile sales growth and margins. The company’s cost-saving program has been in place for some time and has yielded operating margin gains.

The company’s competitive advantage is in its diverse, global customer base and many decades of engineering experience. Stepan’s competitors cannot easily supplant its position with existing customers given the often-custom nature of what Stepan engineers for them.

With a 2025 dividend payout ratio of 43%, SCL’s dividend is highly secure. SCL has increased its dividend for 57 years.

2. Gorman-Rupp Co. (GRC)

Gorman-Rupp GRC began manufacturing pumps and pumping systems back in 1933. Since that time, it has grown into an industry leader with annual sales of nearly $700 million. Today, Gorman-Rupp is a focused, niche manufacturer of critical systems that many industrial clients rely upon for their own success. Gorman Rupp generates about one-third of its total revenue from outside of the U.S.

GRC has increased its dividend for 52 years in a row.

Gorman-Rupp posted fourth quarter and full-year earnings on February 7, 2025. Adjusted earnings per share came to 42 cents. Revenue was up 1.3% year over year to $162.7 million, which matched expectations. The increase in sales was primarily attributed to the impact of pricing increases taken in the year-ago period. Gross profit was $49.2 million for the quarter, or 30.2% of revenue.

The backlog stood at $206 million at the end of December, down from $218 million a year ago. Incoming orders were $659 million, up 6.8% year over year.

Margins have been stable over the past decade, but it does experience boom/bust cycles in revenue generation, leading to lots of earnings volatility, as was the case in 2019 and 2020 following a strong performance in 2018. We are forecasting 11% earnings-per-share growth going forward from our earnings estimate.

The company can achieve this result mostly through high single-digit sales growth. Given the company’s robust backlog of uncompleted work, we see revenue growth continuing for the near term.

Gorman-Rupp’s payout ratio is 37% of earnings for this year following the most recent increase in the dividend, but also higher earnings estimates. The dividend payout is highly secure.

3. Tennant Co. (TNC)

Tennant Company TNC is a machinery company that produces cleaning products and that offers cleaning solutions to its customers. In the U.S., the company holds the market leadership position in its industry, but the company also sells its products in more than 100 additional countries around the globe.

The company continues to generate revenue growth, even in a difficult operating environment. Fourth-quarter revenues of $328 million rose 6% year over year. This was slightly better than the recent trend, as revenue had grown less on a year-over-year basis during the previous quarter. Revenues were higher compared to what the analyst community had forecasted.

Tennant Company generated adjusted earnings per share of $1.52 during the fourth quarter. Management is forecasting that adjusted earnings per share will fall into a range of $5.70 to $6.20 in 2025, which means that earnings will decline this year.

Tennant Company plans to grow its sales inorganically, especially in the Asia/Pacific region, where it benefits from above-average market growth rates. The takeover of Chinese cleaning equipment company Gaomei improved Tennant’s sales outlook in the Chinese market, as well as in other Asian markets. Investments in the business in Asia will increasingly pay off and should deliver solid earnings growth for Tennant in the coming years.

We believe that there will be solid profitability improvements in the long run. For now, our earnings-per-share growth estimate over the coming years is 7% annually.

Tennant Company is the leader in the U.S. cleaning machines market. This serves as a competitive advantage, as Tennant Company’s market leadership allows for better economics of scale and a superior sales network compared to its peers.

TNC has increased its dividend for 54 years.

At the time of publication, Ciura had no positions in any securities mentioned.