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This $1,000 small-cap strategy could earn you a 19% dividend yield

When hunting for a good dividend yield most people invariably invest in large caps or blue chip stocks. This makes sense in a rational world. Large caps are often less likely to disappear and are most likely to pay a reliable dividend.

However, if you are willing to take some risk and do the homework, then there are a lot of great opportunities for yields larger than 10%. In a higher-risk investment like this, I would restrict the commitment to $1,000, potentially split between the below 2 companies. That is because $500 is the minimum initial investment level on the ASX.

Mosaic Brands Ltd (ASX: MOZ)

I think this company is one of the real hidden gems on the ASX. Mosaic is a fashion retailer that owns a number of brands like Noni B, Rockmans, and W.Lane among others. The company lost its way for a while there and has experienced its fair share of ups and downs. However, it had a change of management in 2014 and has seen very impressive results from that point.

At its current price Mosaic has a trailing 12 month (TTM) dividend yield of 20.4%. It sells at a price to earnings ratio (P/E) of 6.3. In its FY19 report, the company reported sales just shy of 10% for its online presence. During lockdown, the company reported in a COVID-19 update an increase in online sales of 80% equivalent to the previous corresponding period of the year prior. 

Risks

Mosaic is likely to post a large EBITDA loss this FY and is hoping to return to profitability in FY21. Dividends are currently deferred and may not resume until H1FY21. The company’s position is precarious. If this goes well it will see a capital increase and a dividend yield of up to 20% on today’s price. If it goes badly you will lose $500.

Navigator Global Investments Ltd (ASX: NGI)

Navigator is the ASX-listed parent of alternative investment manager, Lighthouse Investment Partners, LLC (‘Lighthouse’), based in the United States. The company currently has approximately $12 billion in assets under management. 

Over 5 years the company has been able to achieve an average return on equity of 14.38%. This means about $14 in earnings for every $100 in net assets. This is a profitable figure. In terms of the company’s return on capital employed, Navigator has a 2 year average of 28.7%. So not only is this company very profitable it is also very efficient at making money.

Risks

The primary risks faced by Navigator Global right now is client redemptions. During the pandemic and as we move into a recession, the company’s clients in the US and beyond are likely to redeem some funds. The company is currently selling at a P/E of 5.32. Its share price is down by 57% year to date due, in large, to the coronavirus pandemic outbreak. 

Foolish takeaway

This investment strategy, if successful, will earn a dividend yield of around 19%. This is the reality of investing. If you are able to withstand the risk, then there are relatively large benefits. However, you must do your homework first. Make sure you have a very clear understanding of the risk. And lastly, make sure that you and your finances can take the downside.

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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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