With resources stocks hammered and the big four banks looking ever more likely to post lower or flat earnings in the next few years, investors have few of the usual suspects to turn to.
Add in the woes the supermarket retailers face from discount upstarts, and there's very few stocks in the top 10 that investors can sink their money into.
And that's one reason why it's time to consider looking at smaller cap stocks.
The big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are forecast to cut their dividend payout ratios to as low as 50%, meaning at current prices their yields would be very unattractive.
Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) face tougher competition from upstart discounter Aldi, as well as the Metcash Limited (ASX: MTS) backed IGA stores. Both Woolies and Wesfarmers could see their earnings take a hit if they are forced to cut their profit margins.
If you haven't looked outside the usual suspects, you might be pleasantly surprised too. Not only do smaller companies offer the ability to generate much higher capital growth, but there are plenty offering decent dividends – like the four companies I highlighted earlier today.
Using data from S&P Capital IQ, there are 143 ASX-listed companies with market caps of less than $1 billion paying dividend yields of more than 5%. That's a huge field to select a few stocks for your portfolio, and certainly some of them will be absolute bargains after the recent selloff.
Smaller companies also have the ability to generate huge growth in revenues and earnings, much more so than say the likes of Telstra Corporation Ltd (ASX: TLS) – which dominates its industry and struggles to grow earnings above 5%.
Here's a couple of smaller cap companies that might attract your attention…
Countplus Ltd (ASX: CUP)
A company engaged in providing financial advice, broking services, loans and accounting services, Countplus paid 8 cents in dividends last financial year. With a share price of just under $1.00, that's a fully franked yield of 8.1%. The company could also be a takeover target, given the corporate activity in the wealth management sector over the past few years.
Retail Food Group Limited (ASX: RFG)
Retail Food is not really small, with a market cap of $760 million, but the company has managed to stay off the radar of most while it continues going about its business. The company is a master franchisor, owning brands such as Pizza Capers, Crust, Donut King, Michel's Patisserie, Gloria Jean's, Cafe2U as well as one of Australia's largest coffee bean roasting operations. Retail Foods has 2,446 outlets and is forecasting 20% profit growth in the year ahead. All this from a company boasting a fully franked dividend yield of more than 5%.
Foolish takeaway
It can pay investors to look outside the usual suspects at the top of the market cap tree. There are plenty of smaller companies offering higher yields and better growth prospects.
