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Income investors often focus on the largest companies, as those with lengthy track records of dividend growth are usually the leaders within their industry.

Still, investors could consider expanding their search beyond the large cap names and focus on the smaller caps, which have the potential for outsized returns.

These 3 small-cap stocks are high-quality dividend payers with market capitalizations below $2 billion and dividend yields above 3%.

John Wiley & Sons (WLY)

John Wiley & Sons is a publishing and research company whose operations are split into three segments: Research, Publishing, and Solutions. The company offers scientific, technical, medical and scholarly research journals, reference books, databases, clinical decision support tools, laboratory manuals, scientific and education books, and test preparation services.

Its services also include learning, development and assessment services for businesses and professionals and online program management services for higher education institutions.

John Wiley & Sons reported its first quarter (fiscal 2025) earnings results on September 5. The company announced that its revenues totaled $404 million during the quarter, which represents a decline of 11% versus the prior year’s quarter, which was the same decline rate as during the previous quarter. Earnings-per-share came in at $0.47 for the quarter, which missed the consensus estimate, as analysts had predicted a larger profit for the quarter.

Earnings-per-share were still up by a strong 74% compared to the previous year’s period. John Wiley generated earnings-per-share of $2.78 during fiscal 2024, but it is expected that fiscal 2025 will be significantly stronger.

John Wiley & Sons’ focus on publishing research journals, scientific books, and the like has made the company less vulnerable to other forms of entertainment. Since 2012, total unit sales of books have been declining in the US, but as John Wiley & Sons’ books and journals are not read for entertainment, but rather due to being required reading for students, professionals, and scientists, the company has been relatively immune to this trend.

The company has increased its dividend for 30 consecutive years, making it a Dividend Champion. WLY stock currently yields 3.0%.

Ethan Allen Interiors (ETD)

Ethan Allen Interiors (ETD) is a vertically integrated interior design company that manufactures and sells retail home furnishings, such as beds, dressers, chairs, lighting, mattresses, and decorative pieces. The company sells online and through its network of approximately 302 design centers, of which 161 are independently owned and 141 are company operated.

In fiscal 2023, 16% of net sales came from the Wholesale segment, which includes sales from independently owned stores, while the Retail segment generated 84% of sales.

In late July, Ethan Allen reported (7/31/24) financial results for the fourth quarter of fiscal 2024. Retail sales and wholesale sales decreased -7% and -20%, respectively, over the prior year’s quarter and gross margin shrank from 61.5% to 60.8% due to deleveraging from lower sales. As a result, earnings-per-share fell -29%, from $0.99 to $0.70, though they exceeded the analysts’ consensus by $0.13.

Still, the business is positioned to benefit from long-term work from home trends. Additionally, the business follows a build-to-order business model, where orders are customized to the customer’s preference.

ETD has increased its dividend for the past four years after a dividend reduction in 2020 due to the pandemic. Overall, the company has paid dividends to shareholders for 25 years.

Ethan Allen has averaged a payout ratio of 52% over the past decade. With earnings-per-share expected to grow at the same pace as dividends, we expect that the business will continue to have a decent payout ratio over the intermediate term. Ethan Allen has no debt, which adds a strong level of safety to the company, but investors should understand that this business is vulnerable to economic downturns.

ETD stock currently yields 5.2%.

Chesapeake Financial Shares (CPKF)

Chesapeake Financial is a one-bank holding company headquartered in Virginia. It was founded in 1900 and despite its long operating history, has grown to only 16 locations, offering community banking and wealth management services. The company’s market capitalization is just $84 million, and it produces just over $60 million in annual revenue. The bank has $1.5 billion in total assets.

Chesapeake posted second quarter earnings on July 23rd, 2024, and results were about equal to what we saw a year ago. Earnings came to $3.037 million, which was equal to a year ago. Reported earnings-per-share came to 64.6 cents, which was off fractionally from 64.8 cents a year ago. Total assets came to $1.533 billion, up $62 million from year-end. Nonperforming assets were 0.237%, which was much better than 0.327% a year ago.

Chesapeake successfully navigated the Great Recession, but growth since earnings normalized has been fairly weak at ~5% annually. We are estimating growth of 5% annually as the expected base of earnings is now lower than before, as loan growth is picking up with Chesapeake taking advantage of higher lending rates, which should also bring margin improvements.

Chesapeake’s very low loan-to-deposit ratio could be a source of growth should the bank decide to take advantage of its much higher deposit base, with some of that being evident in year-to-date 2024 results. Credit quality is holding up nicely, but management is somewhat cautious.

Credit quality remains outstanding, and the bank said it is as good as it has ever been. We also see the dividend continuing to rise at a modest rate for the foreseeable future, keeping its streak of dividend increases alive and seeing the payout rise to 79 cents over the next five years.

Chesapeake’s payout ratio has always been very low, and we expect it will remain as such in the coming years. The good news is that the streak of dividend increases should be safe in just about any environment, since even an enormous decline in earnings should allow Chesapeake to continue boosting the payout by small increments. Chesapeake continues to boost the dividend in all kinds of macroeconomic environments.

CPKF has increased its dividend for 31 consecutive years and the stock currently yields 3.4%.

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