Like Dividends? You'll Love These 3 Small Caps Yielding Over 5%

By Brian Stoffel Markets Fool.com

Image source: Getty Images.

Continue Reading Below

Finally -- after years of sitting near all-time lows -- it appears that the Federal Reserve will raise interest rates. Soon, retirees will be able to park their money somewhere safer than dividend-paying stocks.

But that doesn't mean you should abandon these versatile holdings altogether. In fact, there are a number of under-the-radar dividend payers that offer considerable value for investors willing to take a little more risk. Below, I'll discuss three stocks with market caps under $2 billion that offer healthy and sustainable dividend yields above 5%.

Wood pellets never looked so good

For a long time, wood pellets were the fuel of choice exclusively for rural northeastern homeowners during brutal winters. But times have changed: facing demanding regulations to cut back on emissions, European power plants have been shifting from coal to newer sources of power. Among the most popular: wood pellets largely coming from the American Southeast.

Enter Enviva Partners (NYSE: EVA) -- a limited partnership that is by far the biggest player in the wood pellet markets. Unlike years past, wood pellets offer a compelling investment: Because of these European players, demand is present year-round. And the power companies are signing long-term contracts that ensure a steady stream of revenue no matter the economic conditions.

Continue Reading Below

Image source: Getty Images.

Enviva aims to have a coverage ratio of 1.15 -- which is the equivalent of saying that it doesn't want to be using more than 87% of its distributable cash flow to pay its dividend. Currently, that dividend yield stands at 7.6%. And for the full year, Enviva's coverage ratio will be "well above" the 1.15 mark -- a great sign for investors who want to be sure that the company's yield will be around for more than just a few quarters.

A tiny Nebraska company helping hospitals spend money efficiently

Recently, a small company from Lincoln, Nebraska, decided to rebranditself as NRC Health (NASDAQ: NRCIB). Previously known as National Research Corporation, it specializes in helping hospitals and other healthcare organizations understand how they are responding to all of their stakeholders. Under its "Eight Dimensions of Patient-Centered Care," the company measures a number of different metrics -- ranging from patient and family experience to physician and employee engagement.

Image source: Getty Images.

Offering these services as a bundled subscription service, NRC Health has been able to enjoy strong margins, resulting in solid free cash flow. That has helped the company support a dividend payment that currently sits at 5.8%.

In 2015, free cash flow came in at $19 million, but only 53%of that was needed to make the dividend payment. This year, the company not only upped its payout by 33%, but it paid a one-time special dividend of $2.64 per share -- roughly a 7.8% yield at the time.

If we back out that special dividend, the company has still only used 68% of free cash flow to pay the dividend through the first nine months of the year. Going forward, that dividend will inch up once again in 2017 by 25%.

Those annoying ads before movies actually produce some high-margin sales

Finally, we have National CineMedia (NASDAQ: NCMI). The company provides a platform for businesses to display advertising on movie screens across America in theatre lobbies and on the big screens before the actual movie is played.

Image source: Getty Images

While this may seem like a silly and low-moat business to invest in, it's important to note that National CineMedia was formed by a triumvirateof theatre owners in 2005: AMC Entertainment, Regal Entertainment Group, and Cinemark Holdings. Together, these three have over 20,500 screens in North America, and as long as these three are still the majority owners in the business, National CineMedia's moat is miles wide -- no other vendor will be allowed to offer up ads in these theatres.

As you might have guessed, such an arrangement allows for lots of cash flow, and few capital expenditures. Over the past nine months of 2016, the company has raked in free cash flow of $82 million, and used just 50% of it to pay its dividend -- which currently yields 5.8%. It should be noted that the rest of the free cash flow -- and, sometimes, even more -- is distributed to the three founding companies, so the payout ratio may appear higher on some websites.

But the bottom line is that while this may not be a great growth stock, it will consistently provide superior returns for shareholders as long as people are still going to movies.

I wouldn't suggest pouring a large portion of your nest egg into any one of these high-yielding stocks. NRC Health competes in an industry with much bigger players. And Eniviva and National CineMedia face significant long-term headwinds -- the former in the form of alternative sources of sustainable energy, and the latter in the form of distribution channels that seem to be disrupted every year.But you are getting paid for that uncertainty with outsized dividend payments that are reliable and stable for now.

10 stocks we like better than National CineMedia
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and National CineMedia wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of Nov. 7, 2016

Brian Stoffel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.