Small, Value, Dividends: The "Triple Threat"

John Buckingham of Al Frank Asset Management says investors should focus on a “triple threat” combination: small-cap value stocks that pay good dividends.

“In investing I would argue that the best long-term returns come from three great ingredients: value, small capitalization and dividends,” Buckingham writes in a Forbes column. “Each attribute separately has been subject to investor adoration. Together they form a triple threat for total returns.”

Buckingham says that, according to Morningstar, small-cap stocks outperformed their large-cap peers by an 11.3% to 8.9% margin (annualized returns) from 1926-2011. Throw value into the mix and it gets even better. According to Morningstar, Buckingham says, small-cap value stocks have produced annualized returns of 13.9% over that period. Large-cap value plays were a distant second, at 10.8%, while small growth stocks returned 9% and large growth stocks returned 8.7%.

As for dividends, Buckingham says his firm has performed its own research. “Over the period from June 1927 through December 2011, the top 30% of dividend payers have seen an annualized return of 11.2%, while the middle 40% have returned 10.3% per annum and the bottom 30% have returned 8.8%,” he writes. “Nondividend payers have returned 8.3%.”

Given all that, Buckingham says, “I think investors who are able to stomach the added volatility should consider buying a basket of small, value-priced, high-dividend-paying stocks.” He offers three picks. Among them: Lexmark International.