It's easy to o verlook small-cap stocks when it comes to dividends. Many small companies are barely profitable, focusing more on growth, and they aren't at a stage where they can dole out extra cash as dividend income.

But a few areas of the small-cap universe pay out well above the 1.4% yield of the S&P 600, an index of profitable small companies. Regional banks are fertile territory, yielding an average 2.1%. Several real estate and consumer stocks also yield more than 3% and have growth drivers that could keep their stocks moving up.

We wouldn't suggest owning small-caps solely for dividends. The S&P SmallCap High Dividend Low Volatility ETF yields 5%, for instance. But its total return is negative 16% over the last five years against a 40% return for the State Street SPDR Portfolio S&P 600 Small Cap ETF.

Investors should also be wary of high and possibly unsustainable yields. The Invesco ETF's top holding, for instance, is a cannabis-oriented real estate investment trust, Innovative Industrial Properties. The REIT is up 60% this year, thanks to a successful capital raise and better-than-expected earnings. And it yields 12%. But it's paying out more than 100% of adjusted funds from operations (a REIT measure of cash available for distributions). That is often a red flag that a payout isn't sustainable.

Investors may be better off with lower yields backed by a financial cushion and some earnings growth drivers to keep both the stock and dividend on the upswing. Among index funds, the VictoryShares US Small Cap High Div Volatility Wtd ETF offers a 3.2% yield, and boasts a solid long-term record returning 10% a year on average over the past decade.

Active funds are harder to find. Out of more than 1,600 small cap mutual funds and ETFs in Morningstar's fund database only about 25 market themselves as "dividend" funds and none of these boast 10-year returns in the top half of their categories.

Investors can still hunt for individual stocks. Regional banks are one fertile area, according to Elena Khoziaeva, portfolio co-manager of Bridgeway Omni Small-Cap Value Fund. Small banks are seeing profits rebound thanks to a steady economy which has boosted loan growth and stable short-term interest rates that have kept the cost of deposits level.

Khoziaeva's fund, which uses quantitative screens to sift for stocks with price-to-book value and price-to-earnings, has an overall yield of 1.2%. But she says there are a number of bank stocks that yield at or near 3% in her portfolio. One is Los Angeles based Hanmi Financial Corp. While shares have rallied 18% this year, it still yields 3.5%. Wall Street analysts forecast earnings to grow 26% for the year.

Another is Puerto Rico's OFG Bancorp, which is up 21% in 2026, and yields 2.8%. Wall Street analysts expect full-year profits to increase just 3%, although that is forecast to accelerate to around 10% by 2028. Both stocks have steadily increased payouts in recent years, Khoziaeva notes.

Jeremy Javidi, portfolio co-manager of Columbia Small Cap Value Discovery Fund, also shares picks. One of Javidi's favorites is Polaris, maker of off-road vehicles like snowmobiles and ATVs, with a 4.1% yield. Shares have struggled in declining more than 50% from their Covid-era high. Like other outdoors companies, it rushed to meet ballooning lockdown demand only to see dealers left with extra inventory when the crisis passed. Things are starting to turn around. Analysts have been rapidly raising their profit forecasts, doubling their estimates for Polaris' 2026 earnings in the past year. That helped the shares rally about 39% during that time.

Javidi says recent channel checks suggest the leftover inventory has been mostly worked through and his interviews with management suggest they are bullish about the company's coming models, which should drive sales and help them realize higher average sales prices. "You're starting to see improvement in their margins and factory utilizations." he says. "That should drive the top line as well as allow them to regain market share."

Among real estate stocks, another prime area for dividends, he likes Kite Realty Group, which has rallied 18% this year, outpacing the broader real estate sector, which is up 12%. Kite, which yields 4.1%, owns shopping centers with many concentrated in Sunbelt states like Florida and Texas.

While the growth of online shopping has made that a tough business. Javidi notes the company has managed to find growth by focusing on properties anchored by grocery stores and those that offer entertainment along with shopping. He cites Kite's stake in the Dallas-area Legacy West development which includes high-end shops like Tiffany and Coach with offices and apartments.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 12, 2026 02:00 ET (06:00 GMT)

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