Whilst the S&P/ASX 200 (ASX: XJO) (^AXJO) has been flying high, rising 21% in the past year not including dividends, there are parts of the market that remain underserved — small caps.
Over the same period the S&P/ASX Small Ordinaries (ASX: XSO) has fallen! We've seen many 'mum and dad' investors transition their money from poorly performing term deposits and interest accounts into big dividend-paying stocks like the banks, supermarkets and Telstra (ASX: TLS)
You couldn't blame them either, Australia's blue chip stocks are still outperforming the market and it looks set to continue. Or so it seems. Banks are posting record profits, retailers are boosting market share and Telstra continues to dominant the industry.
However it's unlikely bank stocks will grow at the same pace they did throughout 2012 and 2013, so we've now got to reassess our exposure to them and look for other opportunities. One part of the market that remains cheap is small caps.
Want dividends with that?
Many small-cap stocks offer the same yields as blue chips but have more room for growth. For example, Webjet (ASX: WEB) and Mortgage Choice (ASX: MOC) offer full franked dividends above 4% yet have market capitalisations less than $400 million.
Going even further down in size there are many businesses that are profitable and like to reward shareholders. Equity Trustees (ASX: EQT) and Oakton (ASX: OKN), which have market caps below $200 million, pay out dividends of more than 5%.
If you think that's impressive, think again. Many small or mid-cap stocks pay dividends up to 10% grossed up. BC Iron (ASX: BCI) is a small but extremely successful mining stock that pays a dividend of 7.7% plus franking credits.
Foolishtakeaway
In investing, it's important to look beyond what the crowd is doing. Our job is to find the stocks that the market has gotten wrong and purchase at a sensible entry point. Finding stocks that provide capital growth and income are every investors dream.
