4 Large US Dividend-Paying Small Caps for Big Second-Half Gains

What a difference a couple of days can make as the stock market rallied big on the worries of the Brexit becoming much less of a factor as polls and the betting parlors in England appear to show the voters want to stay in the European Union. Then, new polls came out Tuesday showing the “leave” vote was ahead, and the volatility jumped again. With most of the market now turning the attention to the vote and second-quarter earnings, and with the S&P 500 barely positive for the year, adding alpha will be a priority for the rest of 2016.

One good way to add alpha to portfolios is to look for the higher quality, biggest domestic small capitalization stocks. In a new report, Jefferies screened its universe and found 19 stocks that fit the criteria:

  1. The stocks are rated Buy.
  2. Their market capitalizations are above $2 billion.
  3. They are in the top quintile based on return on equity.
  4. Less than 20% of sales come from outside the United States.

These four look very attractive now and also pay the highest dividends.

American Eagle Outfitters

This top retail stock had been acting much better since bouncing off lows posted in early February. American Eagle Outfitters Inc. (NYSE: AEO) is a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under its American Eagle Outfitters and Aerie brands.

The company operates more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom, and it ships to 81 countries worldwide through its websites. American Eagle Outfitters and Aerie merchandise also is available at 119 international stores operated by licensees in 18 countries.

Top Wall Street analysts have highlighted that the company offers among the clothing sector’s best denim execution and on-trend fashion, and those positives could drive traffic upside, as well as be long-term drivers of international, Aerie, digital and omni inventory. Good execution, solid inventory control and the trend for old-school denim fashions are all positives.

American Eagle investors are paid a solid 3.35% dividend. The Jefferies price target for the stock is $24, and the Thomson/First Call consensus target is posted at $17.75. Shares closed most recently at $14.97.

Federated Investors

This top financial services company makes good sense for investors now. Federated Investors Inc. (NYSE: FII) provides its services to individuals, including high net worth individuals, banking or thrift institutions, investment companies, pension and profit-sharing plans, pooled investment vehicles, charitable organizations, state or municipal government entities, and registered investment advisors.

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