If you’ve read my columns here or in our monthly Xcelerated Profits Report newsletter, you know that I focus on the small-cap space – both in my specialist areas of healthcare and biotech and other sectors, too.

Typically, these small-cap stocks are ripe for big gains more so than income through dividends. But I’m actually a big fan of dividends, too.

So what if there were a way to load your portfolio with outstanding profit potential and generate income, too? There is – and I’ve got three stocks below that can do the job…

Digging For Dividends

I’m not a market timer so I’m not going to tell you that now is the time to get out of equities before the market turns lower.

But what I will say is that with the Nasdaq and Russell 2000 (small-cap) indexes having blasted off their lows by 58% and 67% respectively, it makes sense to get a bit more defensive.

The reason is two-fold – and very simple: Owning dividend-paying stocks generates income and improves a portfolio’s return over the long-term.

However, it’s hard to find good small-cap companies that pay dividends. Smaller companies usually pour any excess cash back into the business to help it grow, rather than distributing it back to shareholders.

In fact, of more than 7,400 stocks with market caps under $1 billion, only 1,356 pay dividends. And if you want a meaningful dividend yield – let’s say 3% – the number decreases to less than 800.

I further whittled down the list to companies with high current ratios, low debt, and profit expectations to help ensure that dividends would continue to get paid.

I also stayed away from companies that paid a very high dividend. Companies with yields approaching 10% or higher may find those payouts unsustainable if business continues to be difficult.

Yes, if you want a higher potential reward, you do need to take on more risk. But buying stocks with sky-high dividends is riskier than those with solid but more sensible yields.

Here are three of the best from my small-cap dividend stock screen…

A Trio Of Small-Cap Dividend Stocks

• WD-40 Company (Nasdaq: WDFC): The company makes everyone’s favorite industrial lubricant – WD-40 – plus household cleaners and other products. Through the first nine months of its fiscal year, it generated $18 million in profits and boasts $36 million in cash versus $21 million in debt. Earnings per share are expected to grow 13% in fiscal 2010.Current dividend yield: 3.4%

• American Ecology Corporation (Nasdaq: ECOL): The firm handles America’s hazardous waste. Not a great business if you’re the guy with the rubber gloves moving barrels of the stuff. But not bad if you’re an investor – particularly a new one, given that the shares have endured a beating over the past year.ECOL is profitable, has $24 million in cash and no debt. Over the first six months of 2009, it generated $17 million in cash from operations. So far it has paid out over $6 million in the form of dividends.Current dividend yield: 4%
• CDI Corporation (NYSE: CDI): The company provides engineering and information technology staffing services. With so many businesses cutting jobs, it’s had a tough time over the past year. But it’s still profitable, with earnings per share expected to nearly double next year. It has $77 million in cash, no debt and generated $10 million in cash from operations.Current dividend yield 3.6%.

If you have any small-caps paying dividends in your portfolio, use the “Comments” link below to let me know which ones are your favorites and I’ll run a follow-up column, featuring stocks sent in by readers. Be sure to tell me why you like the stocks, too.

Hoping your longs go up and your shorts go down.

Source: How To Grab Growth And Solid Income From The Small-Cap Sector

Here at Notes we spend the best part of the day combing the little-known world of contrarian investing for money-making ideas the mainstream has overlooked.

We call it the underground, because the kind of market intelligence we dig up can’t be found in the mainstream press. And many of the ideas that circulate in this hidden world actually take advantage of mainstream manias and hysterias to bag big profits.

Small-cap expert Marc Lichtenfeld at The Smart Profits Report says the secret to this profit-income combo is to look for that rare flower: small-cap stocks that pay solid dividends. Now, most investors don’t look to small-caps for income potential. But although most small-caps recycle profits back into the company growth, a number of small-caps do pay dividends…

Owning dividend-paying stocks generates income and improves a portfolio’s return over the long-term.

However, it’s hard to find good small-cap companies that pay dividends. Smaller companies usually pour any excess cash back into the business to help it grow, rather than distributing it back to shareholders.

In fact, of more than 7,400 stocks with market caps under $1 billion, only 1,356 pay dividends. And if you want a meaningful dividend yield – let’s say 3% – the number decreases to less than 800.

I further whittled down the list to companies with high current ratios, low debt, and profit expectations to help ensure that dividends would continue to get paid.

I also stayed away from companies that paid a very high dividend. Companies with yields approaching 10% or higher may find those payouts unsustainable if business continues to be difficult.

Yes, if you want a higher potential reward, you do need to take on more risk. But buying stocks with sky-high dividends is riskier than those with solid but more sensible yields.

Readers should take note that the Nasdaq and Russell (small-cap indexes) have risen 58% and 67% from their lows. So it makes sense to take a more defensive position in small-caps right now. Marc has taken the pain out of choosing the right growth-income balance stocks with three rock-solid picks in this sector…

1. WD-40 Company (NASDAQ: WDFC): The company makes everyone’s favorite industrial lubricant – WD-40 – plus household cleaners and other products. Through the first nine months of its fiscal year, it generated $18 million in profits and boasts $36 million in cash versus $21 million in debt. Earnings per share are expected to grow 13% in fiscal 2010.

Current dividend yield: 3.4%

2. American Ecology Corporation (NASDAQ: ECOL): The firm handles America’s hazardous waste. Not a great business if you’re the guy with the rubber gloves moving barrels of the stuff. But not bad if you’re an investor – particularly a new one, given that the shares have endured a beating over the past year.

ECOL is profitable, has $24 million in cash and no debt. Over the first six months of 2009, it generated $17 million in cash from operations. So far it has paid out over $6 million in the form of dividends.

Current dividend yield: 4%

3. CDI Corporation (NYSE: CDI): The company provides engineering and information technology staffing services. With so many businesses cutting jobs, it’s had a tough time over the past year. But it’s still profitable, with earnings per share expected to nearly double next year. It has $77 million in cash, no debt and generated $10 million in cash from operations.

Current dividend yield 3.6%.

Every month, TFN’s Financial Roundtable gathers the market’s top financial editors to provide perspective on the dominant trends in the world markets. After July’s meeting of the minds with Money Morning’s Bill Patalon and Martin Hutchinson (Financial Roundtable: Top financial analyst predicts $225 oil and $9 gasoline in 2009), August’s event combines the insights of Investors’ Daily Edge’s gurus Rick Pendergraft and Andrew Gordon.

J. Christoph Amberger: Andrew, we have seen oil prices fall from $147 per barrel in July down to $110-111 in early August. We have seen gold plummet from $1,030 in March by as much as $230 per ounce. What do you make of this decline in commodities prices? Have we seen the end of the speculative bubble or is this just a retrenchment in a bull market?

Andrew Gordon: Things sure have changed quickly. It was just July 11 when oil made its high of over $147 per barrel and commodities across the board were hitting highs and Western countries were asking OPEC to increase oil production. As a matter of fact, they did. They increased it by 150,000 barrels a day in July.

But by the time that happened, the market really reversed and oil demand went down. Gas demand went down. A little bump up in oil supplies really pushed down the price of crude. It’s gone down over 20 percent.

I don’t think we’re seeing the end of the secular bull, the commodity bull market and the oil bull market. But certainly the price of oil became so expensive in the U.S. and other countries that it really dampened demand. Demand in the U.S. was about two to three percent less than last summer at this time.

But even in China, crude imports were down by about six or seven percent. It didn’t help that Asian countries have been removing some of the subsidies. So, yes, we’re seeing the reversal of just what was going on about a month ago. But prices are now so low that investors are starting to ask themselves, are we risking demand going up and never having a chance to really establish consumption patterns that save on oil and gas and that begin to use alternative fuel?

In the short term I think these prices are going to go down a little more. But long-term, global growth is still not dead. In many countries it’s still a big factor and the basic fact about global growth and about oil supply is oil supply has not been able to keep pace with global growth. That basic fact is not going to change going into the future and it’s going to put upward pressure on the price of crude.

J. Christoph Amberger: Rick, how do you look at this situation?

Rick Pendergraft: Almost the exact opposite of Andy. On a short term basis, I see oil bouncing right now. You’ve got a lot of support in the $110 range. The 200-day moving average is there. That was a high in March; a low in May. Former support becomes resistance and former resistance becomes support. So I see the 110 level being very hard to get through for oil right now on the short term basis.

Ironically, back in about March I wrote a special report on oil that I thought that long-term, we would see a drop in the price of oil because this global demand is shifting to the left. So the demand is going to pull back a little bit and we’re seeing it more so in this country than any others.

But ironically we had China go offline with some factories. They limited the number of cars on the road for the Olympics to try and cut down on the pollution. The Olympics ended this weekend. It’s going to be interesting to see whether or not when that comes back online when the demand starts rising again over the short term, I do think you’ll see oil bounce back up.

I don’t think we hit $147 again — that is probably the high for the next few years. I just think that the demand globally will shift to the left a bit and we’ll see a little bit of decline in the demand there. That would keep that 147 as a price high for quite some time.

J. Christoph Amberger: OPEC’s president was saying that $70 per barrel would in his opinion be a fair price for oil. Of course, OPEC seems to be as variable with their oil price projections as anyone. What do you make of the down side for oil?

Andrew Gordon: Well, it’s funny. OPEC bases that price a lot on the dollar going down. They said to take away the exchange rate and the price of oil would cost around $70 these days and that’s a fair price. There’s nothing wrong with that so we don’t need to increase production.

People are already talking about the price of crude in the double digits. It hasn’t gone through $110 yet – never mind $100 – and people are already assuming that it’s going to go below $100.

I think it’s going to have difficulty going under $110 even. It may. One hundred – I’m not sure if OPEC will allow it. They don’t have veto power over the price of oil, but they have that bully pulpit and they can certainly jawbone the price of oil up from the $100 level by threatening to reduce oil production or at least slow down development of fields.

I think actually at $90, at $80, you still have the price of alternative fuels, the oil sands, solar power, nuclear power. You will still see the development of alternative energy, but I think $70 is really the threshold. Below $70 it’s really going to impact on the development of alternative fuels. I wouldn’t want to see it fall below that.