The re-election of a familiar political figure has once again stirred interest in small-cap stocks, particularly those offering substantial dividends. In 2016, the market's initial optimism about small companies' prospects led to a brief surge, followed by years of underperformance as reality set in. Now, with a second term, investors are once more eyeing small caps but with caution. This article delves into the current landscape and highlights five high-yielding small-cap stocks that stand out.

Navigating the Small-Cap Market: Opportunities and Challenges

The return of a known political leader has reignited interest in smaller companies. However, this enthusiasm has been short-lived, as valuation disparities between small and large caps have become apparent. The forward P/E ratios for S&P 400 and S&P 600 indices stand at 15.6 and 15.3, respectively, compared to 21.5 for the S&P 500. Investors must be selective, focusing on individual stock performance rather than broad market trends. The environment is becoming increasingly favorable for discerning investors who can distinguish between winners and losers.

In this challenging market, some sectors are showing resilience. Business Development Companies (BDCs) are among the standout performers. Despite concerns over interest rate fluctuations, these companies have demonstrated relative strength. CION Investment Corporation (CION), for instance, offers an impressive 12.6% yield. With a diversified portfolio across various industries and a focus on first-lien debt, CION has managed to deliver solid results. Its innovative dividend structure—combining regular payouts with supplemental dividends—has attracted investor attention. Despite its young age, having direct-listed only in October 2021, CION trades at a 22% discount to net asset value, presenting a compelling opportunity.

High-Yield Mortgage REITs: A Bright Spot in a Turbulent Market

Mortgage Real Estate Investment Trusts (mREITs) have emerged as another bright spot amid market turbulence. Falling mortgage rates have revitalized purchase originations and refinancing activities, benefiting these trusts. New York Mortgage Trust (NYMT), PennyMac Mortgage Investment Trust (PMT), and Ellington Financial (EFC) offer yields ranging from 11.1% to 11.8%. NYMT, despite its lower earnings coverage, has shown significant relative strength, gaining 13% since February. PMT, known for its consistent financial results, has also performed well, though not as exuberantly. EFC, while facing challenges with its dividend history, has maintained solid book value and recently improved dividend coverage.

These mREITs provide a mix of opportunities and risks. NYMT's exit from joint venture assets signals a strategic shift towards better performance. PMT's historical consistency makes it a reliable choice for income seekers. EFC, despite its past dividend cuts, shows promise with its diverse investment portfolio and recent improvements. For investors looking for high yields in a volatile market, these mREITs present intriguing options, requiring careful analysis to maximize returns.