3 Small Cap Dividend Stocks with Growth Prospects

After underperforming in 2020, U.S. small-cap stocks have taken the leadership reins in the early going of 2021. With the S&P 600 up almost 19% year-to-date compared to 4% for the S&P 500, investors are piling into small caps on expectations of a strong economic recovery.

While small-cap equities are generally considered a growth asset class, some payout some sizeable dividends. Here we highlight a few of the small companies that offer the best of both worlds—an above-average dividend yield and attractive growth metrics. 

What is Driving Growth at Ethan Allen Interiors?

Ethan Allen Interiors (NYSE:ETH) is a high-end furniture retailer that mostly leans on selling beds, couches, and area rugs the old-fashioned way at its roughly 300 U.S. and overseas locations.

Strong demand for home renovation during COVID-19 will likely remain a tailwind for some time driving traffic to Ethan Allen's stores and website. Investments in remote, personalized service and virtual reality technology that allows customers to preview furniture layouts in their homes should also continue to help bottom-line performance. Management has noted this new model could allow it to trim its sales force by as much as 30% without impacting sales.

The company has no shortage of competitors including Ashley Home Stores, La-Z-Boy, and Williams Sonoma, but has fared well in the premium end of the market. Its free interior design service appeals to many customers who more than often stick with Ethan Allen to fulfill their home decorating vision.

Another comforting aspect of an Ethan Allen investment is management stability. Chairman and CEO Farooq Kathwari has been in these roles at the company for more than 30 years. He has successfully navigated the ups and downs of the furniture industry and made Ethan Allen one of the most prominent names in the business.

Ethan Allen recently hiked its quarterly dividend to $0.25 and offers a forward dividend yield of 3.4%. Revenue is expected to soon return to pre-pandemic levels aided by improved U.S.-China boosting international sales. Record-high lumber prices are a headwind but operating in the premium furniture segment supports Ethan Allen's ability to comfortably pass the inflation on to consumers.

What are Schnitzer Steel's Growth Catalysts?

As one of the nation's biggest scrap metal recyclers, Schnitzer Steel Industries (NASDAQ:SCHN) was down in the dumps at the onset of the pandemic as weak demand and plunging steel prices weighed heavily. But rising commodity prices backed by improved demand have helped the scrappy company pick itself off the ground.

Schnitzer Steel's stock, which has a 2% dividend, has recovered rapidly thanks to a string of better-than-expected earnings reports. Last quarter adjusted earnings per share (EPS) from continuing operations were more than twice what they were in the prior year period. It was the company's second-best profit level in the past decade.

This was the result of higher demand for recycled metals and finished steel as both iron and non-iron based metal prices continue to bounce back sharply. Prices have surged because the market went from a period of de-stocking and low inventory right into significantly ramped production at steel mills and smelters.

What distinguishes Schnitzer in the world of metal recycling is its superior technology. Investments in advanced metal recovery technologies helps it yield copious amounts of metal and do so in a highly efficient manner. As the global de-carbonization trend rolls on, demand for recycled scrap metal from automakers and other industries is forecast to accelerate. Schnitzer's lower-carbon technology puts in a favorable position to attract much of the demand.

Aside from better pricing and technological advantages, China represents another potential growth catalyst. The country is once again becoming a major scrap metal importer as its economy rebounds and it seeks out the product to support infrastructure development, electric vehicle manufacturing, and clean energy initiatives.

Is Marine Products Stock a Buy?

Marine Products (NYSE:MPX) is one of the nation's biggest powerboat manufacturers. The Ethan Allen of the boating world, it sells premium pleasure boats and fishing boats under the Chaparral, Robalo, and Vortex brands. The business has turned in 10% annualized profit growth over the last five years amid steady demand from boating enthusiasts and healthy margins.

More recently, Marine Products is benefitting from people hitting the lakes and oceans as a reprieve from homebound life. This has expanded the company's customer base and sparked a nice rally in its stock. After surging to a pandemic high of $22.61, the stock has returned to shallower waters offering investors a chance to climb aboard.

The growth prospects span the globe for Marine Products which sells its fiberglass motor boats though a network of more than 250 independent authorized dealers. Pent-up demand for vacations and recreation will likely provide a one-two punch for the company alongside the current pandemic-driven demand.

Unfortunately, COVID-19 forced the cancellation of the 2021 winter boat show season, an important time for boat manufacturers to showcase their latest models. Aside from having to focus much of its marketing effort online, Marine Products will also be challenged by ongoing supply chain constraints at a time when demand is high.

Ultimately, the company should be able to work through these challenges. Its strong reputation in boating and sought-after premium brands will keep buyers patient and not jumping ship to a competitor. As supply chain constraints and labor shortages improve, eventually supply should catch up with demand allowing Marine Products to book higher revenue and improve off its 18% sales decline of 2020. There have been early signs of progress after fourth-quarter production rates exceeded those of the company's normal fourth quarters.

Last month it announced a 25% dividend increase moving its dividend payout closer to its pre-pandemic level. Strong demand trends and improving dealer inventories point to smoother sailing ahead for Marine Products stock.