From the rise of the retail investor to high-frequency algorithmic trading, there have been several powerful stock market developments the last couple of years. One thing, however, has stayed the same—the basic return components of an equity investment strategy, growth and income.

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Growth also referred to as capital appreciation, comes from higher security prices and is the main force that drives portfolio values higher. Technology innovators and smaller companies are two of the biggest examples.

Then there is income, which is derived from dividend-paying companies that reward shareholders with periodic cash or share ‘bonuses’.  Defensive businesses and mature large caps often fit the bill.

For investors that deploy a ‘growth & income’ approach, there’s a great way to kill to birds with one stone—small-cap dividend stocks. A subset of this select group are smaller companies that have a history raising their dividends and have the expected cash flow to keep doing so. These are three of the most attractive dual threats.

Is Big Lots Stock a Good Value?

Big Lots (NYSE: BIG) offers one of the most generous dividends among U.S. small caps. In fact, the 2.7% forward yield is well above that of the large-cap S&P 500 and has plenty of room to go higher. That’s because the discount retailer pays out 21% of its profits as dividends. So, Big Lots clearly has the income element, but what about the growth potential?

It has that too. Although unfavorable comparisons to pandemic-driven shopping and near-term supply chain challenges are expected to result in minimal profit growth next year, the three-to-five-year outlook is bright. With the company’s Operation North Star initiative pointing the way, investments in technology and infrastructure along with a focus on sales growth and cost controls point to improving long-run financial performances. The addition of low-priced national brands to the usual assortment of close-outs should be a key driver of customer growth.

Big Lots is a big-time value in a small-cap wrapper. It is trading at 7x next year’s earnings estimate which combined with the $0.30 per share quarterly difference makes it a must-have for growth and income shoppers.

How are Johnson Outdoors’ Financials?

Fishing and outdoor recreation specialist Johnson Outdoors (NASDAQ: JOUT) offers a nice blend of growth and income. What should reel in investors on the income side, is the company’s seven-year streak of dividend increases. It is a pattern that will likely persist for the foreseeable future given the debt-free balance sheet and strong underlying cash flow.

Johnson’s lineup of well-known fishing, camping, diving, and watercraft brands are sold globally with the Minn Kota, Humminbird, and Cannon fishing brands the dominant part of the business. The company has received a fortunate boost lately in the form of increased consumer interest in all things outdoors that should carry over to the post-pandemic world. Future Covid restrictions aside, people around the world have taken a fresh liking to outdoor recreation that should keep them coming back to Johnson’s higher-end brands.

Johnson Outdoors has handily topped EPS expectations in each of the last four quarters and has a good chance to do so again with the bar set low ($0.65) for the holiday shopping quarter. More importantly, it is a cash-generating machine with an expanding operating margin. Add this to the 16% payout ratio and the dividends should keep flowing downstream and into investors’ pockets.

Is Strategic Education Stock a Good Value Play?

Strategic Education (NASDAQ: STRA) has fallen woefully out of favor after riding the remote education theme surge in the early months of the pandemic. Disappointing quarterly results, weak enrollment figures tied to low job demand, and weakness in the key Australia/New Zealand market have dragged the share price to its lowest level since 2016. The good news: the bottom may be in.

The provider of post-secondary and other academic programs has two strong brands in Capella and Strayer Universities that along with its other businesses generate more than $1 billion in revenue. Higher education enrollments were down again last quarter but are trending in the right direction since last year. Strategic Education’s alternative learning business that caters to employers is growing and is an underappreciated growth catalyst for the company. Segment revenue jumped 49% in Q3 and while it was still a fraction of overall revenue, there is a long runway here with U.S. employers increasingly looking to attract and retain workers with in-house learning and advancement opportunities. Management is also optimistic about the possible reopening of Australia’s border by year end which would boost international student enrollments.

Despite the recent setbacks, Strategic Education’s financials are still in good shape which has allowed it to maintain its juicy $2.40 annual dividend. This means the stock currently offers a 4.4% forward yield. And at 12x next year’s earnings, it may be a good time for growth and income investors to enroll.



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