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

CNBC

05-06-2025

Investors looking for both a bargain and income can find them in small-cap stocks, but they should be selective, according to Bank of America. Dividends are more prevalent than buybacks in the cohort, with some 40% of the Russell 2000 paying a dividend today, the firm said in a note Tuesday. While small caps face greater risk from tariffs and macro uncertainty, as well as from higher rates, they remain cheap compared with large-cap stocks, equity and quant strategist Jill Carey Hall wrote. The Russell 2000 was the first to enter bear market territory after President Donald Trump 's sweeping tariff policy was announced in April. A bear market is a 20% or more decline from a previous high. While the index has reversed course, it is still about 15% off its high and down more than 5% year to date. The S & P 500 is up more than 1%. Hall sees "ample opportunity" in the space, as well as room for payout ratios to rise. "Cash return to shareholders has been a historically outperforming style within small caps in both 'Downturn' and 'Recovery' regimes (the two phases our US Regime Indicator has been bouncing between for the last two years)," she said. With that in mind, she screened for Russell 2000 stocks that have dividend yields greater than that of the 10-year Treasury, which is currently around 4.39%. The names also have a Bank of America dividend rating of 7, which means the payouts are stable or likely to go up. Here are some of the buy-rated names that made the cut. A number of real estate investment trusts made the list, including Ryman Hospitality and Sabra Health Care . The former has a 4.8% dividend yield, while the latter yields 6.8%. Hospitality and lodging REIT Ryman Hospitality specializes in upscale convention center resorts, including the Gaylord Opryland Resort & Convention Center. It's a name that investor Jenny Harrington, CEO of Gilman Hill Asset Management, picked up after its tariff-induced sell-off . "They have five of the top 10 largest non-gaming conference centers, and so they get lumped in with the hotel REITs. But their dynamics are completely different," she said in April. The locations are usually booked out two to five years in advance, and the company has huge cancellation fees, Harrington noted. Last month, Ryman Hospitality reported financial results that topped expectations. Its first-quarter adjusted funds from operations were $2.08 per share, versus the $1.68 a share anticipated from analysts polled by FactSet. AFFOs are a measure of REITs' financial performance. Revenue was $587.3 million, beating the $548.4 million consensus estimate. The stock is down nearly 8% so far this year. Sabra Health Care REIT, on the other hand, is up about 2% year to date. The company focuses on skilled nursing/transitional care facilities, senior housing, behavioral health facilities and specialty hospitals. Senior housing and skilled nursing facilities are expected to benefit as the population ages . Those aged 65 and older in the United States are expected to make up about 21% of the population by 2030, up from 17% in 2020, according to the Census Bureau . That percentage is expected to keep growing through 2060. Sabra Health Care's first-quarter normalized FFO came in 1 cent short of the FactSet consensus estimate 36 cents. However, its revenue of $183.5 million beat the $178.4 million expected by analysts. Among the energy names on Bank of America's list is Northern Oil and Gas , which is a non-operator in the acquisition, exploration and development of oil and natural gas properties. The stock yields 6.4% and has fallen about 24% so far this year. Northern Oil and Gas' first-quarter adjusted earnings and revenue both beat expectations. The company also said it saw a 13% increase in barrel of oil equivalent (BOE) production from the first quarter of 2024. Lastly, utility company NorthWestern Energy has a 5% dividend yield. In April, the company reported first-quarter adjusted earnings that beat expectations, but its revenue came in below the Street's estimates. Shares are down about 1% year to date.