2 Biggest Surprise Dividend Stocks Winners of 2016

By Andrew Tonner Markets Fool.com

Image Source: Getty Images

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2016 offered plenty of surprises for investors, most of them positive. After beginning last year with an early-year sell-off, major stock market indices marched steadily upward for the remainder of the year, ending with double-digit gains for the sixth time in the last eight years.

Like every year, some individual stocks vastly outperformed the stock market's return. Here's a quick snapshot of two dividend stocks that easily beat the broad market's return last year.

Company

Market Capitalization

Dividend Yield

2016 % Price Change

Quad/Graphics

$1.3 billion

4.6%

229.2%

Kronos Worldwide

$1.4 billion

4.4%

190.8%

Data source: S&P Global Market Intelligence.

It bears quickly noting that I intentionally excluded energy-related stocks from this list since the rebound in energy prices throughout the year acted as an industrywide catalyst for a number of triple-digit gaining stocks. Importantly, both names on this list share another important characteristic other than not operating in the energy industry. In each case, the two companies on this list dramatically unperformed the market in 2015, which certainly created the conditions for their subsequent rallies in 2016.

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KRO data by YCharts.

In this article, we will look into the specific factors that fueled the 2016 rallies for Quad/Graphics (NYSE: QUAD) and Kronos Worldwide (NYSE: KRO) and whether their shares deserve further research from investors today.

Quad/Graphics

Shares of specialty printer Quad/Graphics cratered 60% in 2015 as declining revenue and pricing pressure in the second half of the year caused the formerly profitable commercial printing company to swing to a loss on the year. Heading into 2016, the analyst community had essentially given up on Quad/Graphics, expecting the company's losses to continue. As they saw it, structural changes in the advertising industry would eventually send the company the way of the dodo.

Led by CEO Joel Quadracci, the company enacted an aggressive cost-cutting programin 2016 that allowed it to reverse this trend and return to profitability in a series of impressive early 2016 earnings beats that sent its shares soaring.

Metric

Q1 2016

Q2 2016

Quad/Graphics EPS

($0.31)

($0.15)

Analyst Expect EPS

$0.26

$0.03

Difference

$0.57

$0.18

Data source: Yahoo! Finance.

Going forward, it seems the analyst community expects the company to continue to grow its earnings this year and next year. Though threats from digital advertising will likely always loom as a risk factor for Quad/Graphics, the company currently trades at 17 times its next-12-month earnings. Management continually reaffirms its commitment to maintaining its dividend as well, which, at 4.4%makes the company something of an interesting ongoing small-cap turnaround scenario.

Kronos Worldwide

High-yield dividend stock Kronos Worldwide is an important reminder that not everything that glitters is necessarily gold. The company produces and sells titanium dioxide, a pigment used across a wide range of industrial applications such as house paints and clothing fabrics. Kronos stock has been on a tear over the last 12 months, despite an ongoing price slump for titanium dioxide, as my Foolish colleague Tyler Crowe recently noted.

Digging into the company's recent financials, two important trends stand out. First, Kronos' most recent quarterly report(FY 2016 Q3) revealed some much-needed signs of improvement in its core operations. Pricing pressure in the first half of 2016 led to a 7% decline in the company's titanium dioxide unit prices through the nine months ending in September 2016. Importantly, though, a 2% increase in unit prices in Q3 2016 may signal that the worst is over for Kronos. Thanks to that renewed pricing strength, the company was able to return to profitability in the third quarter.

Second, though improving, the company continues to tap debt markets to fund a portion of its dividends. Right now, the company's capital structure seems capable of supporting additional borrowing, but the practice clearly isn't sustainable over the long term. Anyone interested in Kronos will need to understand this dynamic in detail before buying.

Foolish bottom line

As you can see, small-cap stocks like Quad/Graphics and Kronos can offer investors significant upside under the right circumstances. However, they also carry unique risks that can send their shares into a nosedive if conditions worsen, as evidenced by their pre-2016 sell-offs. Especially since they often lack the consistent media coverage larger companies enjoy, successfully investing in smaller companies requires diving into their quarterly and annual reports in details before buying shares.

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Andrew Tonner has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.