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Parkland Fuel, which operates gas stations and convenience stores under the Esso, Ultramar, Pioneer, Fas Gas Plus and Chevron brands, will benefit from economies re-opening and more consumers opting for staycations versus flying outside the country.

benedek/iStockPhoto / Getty Images

Although small- and mid-cap stocks got hit harder than blue chips during the pandemic-induced stock-market crash, their returns should trump the giants in the economic rebound.

This typical pattern of small- and mid-cap outperformance may stem from these companies being more sensitive to the economic cycle and ability to grow faster. Furthermore, they often gain attention from bargain-seeking investors with a renewed appetite for risk.

Some small- and mid-cap stocks have started bouncing back from their March lows. Given that the recovery may be bumpy if there’s a second wave of COVID-19, it’s worth looking at small- and mid-cap names that pay a dividend. At least, investors get paid while they wait for the stocks to grow.

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We asked three fund managers for their top small- and mid-cap dividend-paying stock picks.

Aubrey Hearn, vice-president and senior portfolio manager, Sentry Investment Management, a division of CI Investments Inc.

His fund: Sentry Small/Mid Cap Income Fund

The pick: Brookfield Business Partners LP (BBU-UN-T)

Forward distribution and yield: 0.25 cents a share (0.8 per cent)

Shares of Brookfield Business Partners are compelling given the private-equity firm’s track record and strong management, Mr. Hearn says. The Bermuda-based spin-off from Brookfield Asset Management Inc. targets a 15-per-cent to 20-per-cent return on investments and will also buy bankrupt companies prime for a turnaround, he adds. The company’s chief executive officer, Cyrus Madon, has a “track record of creating value by buying low and selling high.” The limited partnership owns stable businesses such as Westinghouse Electric Co., but some of its cyclical investments, including vehicle battery maker Clarios LLC, have been hurt in the economic downturn. Brookfield Business Partners, which has a dividend payout ratio of about 10 per cent, trades attractively at about 6.5 times enterprise value to earnings before interest, taxes, depreciation and amortization for 2021, he says.

The pick: Huntington Ingalls Industries Inc. (HII-N)

Forward distribution and yield: US$4.12 a share (2.4 per cent)

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Hungtinton Ingalls’ US$45-billion order backlog over the next 10 years provides “a lot of revenue visibility,” which many companies don’t have right now, Mr. Hearn says. The Newport News, Va.-based company builds ships, aircraft carriers and submarines for the U.S. Navy. Its foray into unmanned submarines gives the stock a growth element while the threat from China’s rise to power means the U.S. government is likely to keep spending on its naval fleet, he adds. Given the company’s 134-year history, the barriers for potential new competitors are high, he says. Huntington Ingalls has a dividend payout ratio of about 20 per cent, so there’s room to increase the payout while its stock trades attractively, at about 12 times 2021 earnings, he says. A risk stems from not meeting construction milestones, which could mean higher costs.

Don Walker, portfolio manager, PenderFund Capital Management Ltd.

His fund: PenderFund Small/Mid Cap Dividend Fund

The pick: Hardwoods Distribution Inc. (HDI-T)

Forward annual distribution and yield: 0.34 cents (2.1 per cent)

Shares of North America’s largest supplier of hardwood lumber will benefit as the economy continues to reopen, Mr. Walker says. Langley, B.C.-based Hardwoods Distribution is essentially “the intermediary between the sawmills and the cabinet manufacturer,” with 90 per cent of revenue coming from the U.S. market. Sales fell by 23 per cent in April from March amid the pandemic, but rose by 16 per cent in May, he says. “They are 90 per cent back to pre-COVID-19 levels.” The company, which has a solid balance sheet and strong management, aims to increase sales to $1.5-billion by 2023 through organic growth and acquisitions. Hardwoods’ stock trades around 12 times estimated 2021 earnings, while the dividend payout ratio is “less than 20 per cent of normalized cash flow,” he says. A recession is a risk, but Mr. Walker doesn’t “expect this company will be impaired.”

The pick: Information Services Corp. (ISV-T)

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Forward annual distribution and yield: 0.80 cents a share (5.4 per cent)

This provider of registry services for Saskatchewan is an appealing investment because “it’s basically a monopoly,” Mr. Walker says. Regina-based Information Services, which is 30 per cent owned by the province, administers land, personal property and corporate registry services. Saskatchewan’s weak resources-based economy has weighed on the firm’s land registry business in recent years, but the company has also become more efficient and now sells registry information technology services to other companies. It’s also one of two firms, including Dye & Durham Corp., that can collect data for banks and law firms. Information Services, which has about a 50-per-cent payout ratio on a normalized cash-flow basis, is basically a “software company in disguise” but doesn’t get a software multiple, he says. Its stock trades at about 8.5 times cash flow.

Alex Sasso, CEO and portfolio manager, NCM Asset Management Ltd.

His fund: NCM Income Growth Class

The pick: Parkland Fuel Corp. (PKI-T)

Forward annual distribution and yield: $1.21 a share (3.6 per cent)

Parkland Fuel, which operates gas stations and convenience stores, will benefit from economies reopening and more consumers opting for staycations versus flying outside the country, Mr. Sasso says. The Calgary-based firm, whose network spans North America and the Caribbean, has brands that include Esso, Ultramar, Pioneer Energy LP, Fas Gas Plus and Chevron Corp. Parkland is often compared with the larger Alimentation Couche-Tard Inc., but is more vertically integrated because it also owns an oil refinery in British Columbia. Its shares trade at about 21 times 2021 consensus earnings, but that’s reasonable given management’s track record, he says. It also has a 22-per-cent dividend payout ratio based on trailing cash flow. A second COVID-19 wave is a risk, but sales at its convenience stores rose in the first quarter as some consumers wanted to avoid busy grocery stores.

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The pick: Intertape Polymer Group Inc. (ITP-T)

Forward distribution and yield: 0.59 cents a share (6.9 per cent)

This Montreal-based maker of tapes is getting a tailwind from e-commerce that has only accelerated because of COVID-19, Mr. Sasso says. Intertape Polymer also makes protective packaging, such as bubble wrap, and specialty fabrics. It recently launched a line of “social-distancing tape” targeted at businesses in the reopening phase. “Its business is strategically important, so all 27 of its plants are operating,” he says. Tape sales surged in March and April, but slowed in the past two months as customers used up excess inventory. The temporary loss of sales momentum and clients putting long-term growth plans on hold has hurt the stock, he says. Intertape Polymer, which has a 24-per-cent dividend payout ratio based on trailing cash flow, trades at less than 10 times consensus 2021 earnings. A risk is a second COVID-19 wave if it discourages consumer spending.

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