4 undervalued small caps with high dividend yields

The stock market’s recent punishment of good companies has given investors a perfect opportunity to buy stocks with room to grow that pay high dividends. Here are four for your watch list.

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The stock market’s recent punishment of good companies has given savvy investors the opportunity they’ve been waiting for – stocks with room to grow that pay high dividends.

The S&P/ASX 200 (ASX: XJO) (^AXJO) has dropped over 6.5% in the past two weeks, allowing some small caps to shine through the red and into the pockets of many hopeful investors. Here are four stocks I own or would like to own, both for value and income.

When stocks get battered by the inevitable volatility that consumes any stock market, good investors make their move. Over the past 12 month shares in Ruralco Holdings (ASX: RHL) have taken that beating. With tough weather conditions, massive spending on the future, good liquidity and a horizon for expansion, the upside of Ruralco was too big for me to pass up.

Two weeks ago I said that Ruralco could be bargain, and since that time when it was sporting a price tag of $2.80, it’s up 16.8%. Nevertheless it’s still got a good upside, with a P/E of 12 and paying a 6.1% fully franked dividend, it could still be worth your money. The company has been through a rough patch of weather in the past year but managed to still post modest gains in many of its departments. Keep an eye on this one.

Perhaps this next stock doesn’t have the rapid growth of some of my other favourites but Air New Zealand (ASX: AIZ) deserves a mention. Where companies like Qantas (ASX: QAN) and Virgin Australia (ASX: VAH) can’t even afford to pay a dividend, Air New Zealand defies the rules, paying a dividend over 6%. In addition, it seems the market might be seeing it as a value trap, but at a P/E of 7, I think it’s definitely the safest of the big airlines and has the most consistent trend lines.

Don’t get yourself into debt with bad stocks, otherwise Collection House (ASX: CLH) might end up on your doorstep. I don’t say this often, but it’s one of those ‘fantastic’ stocks. The receivable management provider makes collecting debt look easy and has proven its ability to do so over many years. In the past five years, Collection House has raised from below $0.50 a share to open today at $1.51, but still has more to go. It pays a fully franked 4.2% dividend and has a strategy to expand its operations in Australia and New Zealand.

The last one is a favourite of mine and a long held stock. Codan (ASX: CDA) is a company that designs and manufactures a range of specialist electronic products and associated software to government, business and consumer markets. For the half year ended 31 December 2012, revenues were up 83%, diluted EPS was almost triple and cash flowed in at over $22 million but out at only $750,000. Its low P/E and 3.9% fully franked dividend make this one a very appetising stock for any portfolio. However, it seems unloved in the market after consecutive down days. I’ve already purchased the stock a few times on its way down and if it gets any cheaper, I’m going to keep doing it because it’s another one of those ‘fantastic’ stocks, and definitely worth a spot on your watchlist.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Owen Raszkiewicz owns shares in Codan, Air New Zealand and Ruralco.

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