Buy these small-cap stocks with attractive dividends, Bank of America says

Bank of America suggests selective investment in small-cap stocks within the Russell 2000, noting their relative undervaluation compared to large caps and the prevalence of dividends, with approximately 40% of the index paying one. Despite risks from tariffs, macro uncertainty, and higher rates, opportunities exist in companies with dividend yields exceeding the 10-year Treasury, such as Ryman Hospitality (4.8% yield), Sabra Health Care (6.8% yield), Northern Oil and Gas (6.4% yield) and NorthWestern Energy (5% yield), all of which have a BofA dividend rating of 7, indicating stable or increasing payouts.

Analysis

Bank of America highlights a selective investment opportunity in small-cap stocks, particularly within the Russell 2000, citing their current undervaluation relative to large-cap counterparts despite inherent risks such as tariffs, macroeconomic uncertainty, and higher interest rates. Approximately 40% of Russell 2000 constituents pay a dividend, a more prevalent form of cash return than buybacks in this segment. The Russell 2000, which recently experienced a bear market (a 20% decline from its high) following tariff announcements, remains about 15% off its peak and is down over 5% year-to-date, contrasting with the S&P 500's gain of over 1%. BofA equity and quant strategist Jill Carey Hall identifies "ample opportunity" and potential for increased payout ratios, noting that cash return to shareholders has historically outperformed within small caps during both 'Downturn' and 'Recovery' economic phases. The firm screened for Russell 2000 stocks with dividend yields exceeding the 10-year Treasury yield (currently around 4.39%) and a BofA dividend rating of 7, signifying stable or potentially rising payouts. Among the buy-rated selections, Ryman Hospitality (RHP) offers a 4.8% yield; its Q1 adjusted funds from operations (AFFO) of $2.08 per share and revenue of $587.3 million surpassed FactSet analyst estimates of $1.68 and $548.4 million respectively, though the stock is down nearly 8% YTD. Sabra Health Care REIT (SBRA), yielding 6.8% and up about 2% YTD, reported Q1 revenue of $183.5 million, beating the $178.4 million consensus, while its normalized FFO of $0.35 per share was slightly below the $0.36 estimate; the company is positioned to benefit from an aging demographic. Northern Oil and Gas (NOG) has a 6.4% yield but has declined approximately 24% YTD; its Q1 adjusted earnings and revenue exceeded expectations, and the company reported a 13% increase in barrel of oil equivalent (BOE) production in its first-quarter results. Lastly, utility NorthWestern Energy (NWE) provides a 5% yield, with Q1 adjusted earnings beating forecasts while revenue fell short; its shares are down about 1% YTD.

Key Decisions for Investors

• Investors should selectively consider dividend-paying small-cap stocks that meet criteria such as yields above the 10-year Treasury and strong dividend stability ratings, aligning with Bank of America's thesis on relative value.
• A thorough due diligence on individual names like Ryman Hospitality, Sabra Health Care, Northern Oil and Gas, and NorthWestern Energy is warranted, assessing their specific sector dynamics, recent financial performance, and stock valuation against potential risks.
• Monitor macroeconomic headwinds, including tariff developments and interest rate trajectories, as small caps exhibit heightened sensitivity to these factors, which could impact both their operational performance and market valuation.
• Consider portfolio diversification within the small-cap dividend space to mitigate company-specific risks, focusing on entities with robust cash flows supporting their payout policies and resilient business models.