Submitted by Michael Lord as part of our contributors program.

5 Undervalued Small Cap Stocks Yielding High Dividends

The appeal of small cap stocks with little to no debt on the books is hard to deny, but the following stocks are also priced at or below book value and pay handsome dividends. In order to select five of the best undervalued small cap stocks with high dividends, we screened thousands of companies, funds, and trusts according to the following parameters:

1. Market Capitalization: $250 million to $1 billion

2. Dividend Yield: Greater than 8%

3. Debt/Equity: 0.0%

4. P/B Ratio: Under 1.0

After screening stocks using these preliminary filters, we ended up with 20 undervalued small cap stocks with impressive dividends. We were able to reduce the list down to our top five favorites based on a number of other factors, including cash flow, stability, analysts ratings, and so forth. However, as with any investment, especially micro and small cap stocks with higher perceived volatility and limited liquidity, it is important to perform your own due diligence before making an investment decision.

1. Ellington Financial LLC Common Shares (EFC)

Ellington Financial LLC is a finance company that specializes in acquiring and managing a variety of mortgage-related assets, such as residential mortgage-backed securities with interest and principal payments guaranteed by US government agencies or enterprises, residential mortgage-backed securities that are backed by sub-prime, prime jumbo, manufactured housing, and Alt-A residential mortgage loans, mortgage-related derivatives, commercial and residential mortgage loans, commercial mortgage-backed securities, equity securities, corporate debt, and other forms of mortgage-related assets.

With a market cap of $611.6 million, Ellington Financial LLC is a fairly large small cap company that realized a net income of $22.6 million for the first quarter of 2014. In addition to strong quarterly growth, the company also provides investors with a dividend yield of 12.9%, a P/E ratio of 10.78, and a price that is below book value.

2. AG Mortgage Investment Trust Inc. (MITT)

AG Mortgage Investment Trust Inc. is an REIT, or real estate investment trust, that acquires, manages, and invests in a diversified portfolio of real estate securities, including residential mortgage assets. Traded on the NYSE, the trust provides shareholders with risk-adjusted returns in the form of capital appreciation and attractive dividends.

With a below book value price, a strengthening housing market, solid financials, and a dividend yield of 12.8%, or $2.40, AG Mortgage Investment Trust Inc. provides dividend investors with a solid opportunity. It is also worth noting that as a result of its strong growth and performance, the trust is projected to offer higher yields in the immediate future.

3. Royce Micro Capital Trust, Inc. (RMT)

Royce Micro Capital Trust, Inc. is an equity mutual fund that was launched by Royce & Associates, LLC to specifically invest in United States public equity markets. The fund invests in a diverse range of companies operating in a variety of sectors. However, as its name suggests, Royce Micro Capital Trust, Inc. primarily invests in the stocks of undervalued companies with market caps under $500 million. The fund uses the Russell 2000 Index as a benchmark for the performance of its diversified portfolios.

In addition to having no debt on the books, the company follows the disciplined investment approach of its founder Chuck Royce, who has 40 years of experience as a successful mutual fund manager, in order to select undervalued micro and small cap companies. With a market cap of $406.7 million, Royce Micro Capital Trust, Inc. is not the largest small cap fund, but it has a stable history, a remarkably high dividend yield of 31.20%, and an annual dividend growth rate of 3.88%. A substantial amount of the fund’s shares are owned by insiders, providing valuable insight into the fund’s current and future performance.

4. Wells Fargo Advantage Global Dividend Opportunity (EOD)

Managed by one of the most stable banks in the US, the Wells Fargo Advantage Global Dividend Opportunity Fund is a well-managed global ETF that primarily invests in a diversified portfolio of common stocks in the U.S. and abroad under normal market conditions. The fund only invests in stocks that are highly likely to increase its dividend offering over time.

The Wells Fargo Advantage Global Dividend Opportunity Fund pays out a yield of 8.7% to its shareholders each quarter. The fund has a P/B ratio of 0.98, making it a suitable option for income value investors. With a stable performance history and a 52-week range of $7.04 – $8.59, this undervalued small cap stock is perfect for investors in search of consistent gains and dividend payments.

5. SandRidge Mississippian Trust II (SDR)

I typically shy away from royalty trusts due to their penchant for volatility, but the SandRidge Mississippian Trust II is grossly undervalued and offers a substantial dividend yield of 29.5%, making it worthy of further exploration. The Sandridge Mississippian Trust II owns natural gas and oil wells in Mississippi, Kansas, and Oklahoma. Currently, it has overriding royalty interest in over a dozen wells awaiting completion throughout these states and over 200 horizontal development wells slated for drilling in the oil rich Mississippian formation.

In addition to having a relatively small market cap of $658.6 million, the royalty trust has exhibited a number of volatile price movements as of late, tumbling by more than 26% over the trailing six-month period. However, SDR’s reserves are valued at $9.5 billion, which is well above its current $5.5 billion enterprise value. In addition to having a wealth of resources underground, the trust also owns an industrial saltwater disposal system that would be valued at 10 times EBITDA if its ownership was in a MLP structure. Due to these factors, the company is significantly undervalued and its stock stands poised to rebound in the near future. The 29.5% dividend yield may also warrant a closer look for dividend investors.

Although each of these small cap stocks are undervalued, have zero debt, and offer substantial yields greater than 8%, it is always a good idea to perform a thorough review of their financial statements and balance sheets in order to identify any unknown liabilities that may affect their future performance. Despite potential concerns related to mortgage exposure or volatility in the commodity markets, the low debt levels of these high dividend, small cap players should mitigate the majority of concerns.

Disclaimer: This content is not meant to be financial advice. The facts written above are the author’s personal experience only. Applying these methods to your finance should be done with caution, and is at your own risk. This article may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company has tried, whenever possible, to identify these forward-looking statements using words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “potential” and similar expressions. These statements reflect the Company’s current beliefs and are based upon information currently available to it. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company’s actual results, performance or achievements to differ materially from those expressed in or implied by such statements. The Company undertakes no obligation to update or advise in the event of any change, addition or alteration to the information catered in this article including such forward-looking statements.