Investors are increasingly turning their attention to small-cap dividend stocks as economic conditions shift. A recent report from Reuters highlights that small-cap American stocks have lagged behind their larger counterparts for an extended period. However, factors such as improving interest rates and strong earnings could signal a turning point for these companies. As of September 4, 2025, analysts are cautiously optimistic about the prospects for small-cap stocks, particularly given the anticipated direction of U.S. Federal Reserve policies.
The small-cap sector, represented by the Russell 2000, includes many financial and industrial companies, which have historically underperformed compared to tech giants in the S&P 500. The current market speculation indicates a potential resurgence for small-caps, especially as expectations grow for interest rate cuts by the Federal Reserve. Lower borrowing costs are particularly beneficial for small companies that often rely heavily on debt financing.
According to Angelo Kourkafas, a senior global investment strategist at Edward Jones, an easing of monetary policy beyond market expectations could unlock pent-up demand for small-cap assets. Similarly, Mark Hackett, chief market strategist at Nationwide Investment Management Group, noted that small caps may experience faster growth rates than larger companies in the coming year.
Despite this optimistic outlook, challenges remain. The Wells Fargo Investment Institute recently downgraded its outlook for American small-cap stocks to “unfavorable,” citing inadequate economic growth to support significant outperformance relative to large-cap stocks in 2026.
Interestingly, a report from Goldman Sachs Asset Management on November 4 indicated some signs of recovery for small-cap earnings. Small-cap companies in the Russell 2000 reported positive earnings in Q2 2025, spurred by increased sales and profit margins. Notably, 25% of Russell 2000 members have reported growing earnings for two consecutive quarters. Goldman Sachs projects that this positive earnings trend may continue into 2026, suggesting that small-cap earnings could potentially surpass those of large-cap stocks.
On an international scale, Goldman Sachs observes that earnings among European small-caps are set for strong growth, and the market appears to favor small-cap firms compared to larger ones. In Japan, small and mid-cap companies have outperformed large-cap firms, driven by solid earnings and robust local demand. Furthermore, U.S. small-cap stocks are currently trading at about 26% less than large caps, with international small caps priced 8% lower, despite forecasts of faster earnings growth. This valuation disparity may indicate that small caps are undervalued and could represent a compelling opportunity for long-term investors.
Top Small-Cap Dividend Stocks to Consider
In light of these developments, investors may want to consider the following small-cap dividend stocks as potential buys:
1. **Sylvamo Corporation (NYSE:SLVM)**
– Dividend Yield: 3.69%
– Market Cap: $1.967 billion
– Analysts suggest a potential upside of 21%. Recently upgraded by BofA analyst George Staphos, the company has implemented a limited-term shareholder rights plan to protect shareholder interests.
2. **SunCoke Energy, Inc. (NYSE:SXC)**
– Dividend Yield: 7.06%
– Market Cap: $575.726 million
– Recent reports indicate a potential upside of 47%, backed by strong performance in Industrial Services.
3. **Apogee Enterprises, Inc. (NASDAQ:APOG)**
– Dividend Yield: 2.76%
– Market Cap: $810.588 million
– The stock has an estimated upside of 27%, with strong revenue growth reported in its recent earnings.
4. **Energizer Holdings, Inc. (NYSE:ENR)**
– Dividend Yield: 6.59%
– Market Cap: $1.246 billion
– Analysts project a 26% upside, despite recent challenges with organic sales.
5. **H2O America (NASDAQ:HTO)**
– Dividend Yield: 3.51%
– Market Cap: $1.715 billion
– The company’s expansion efforts in Texas and recent financial performance indicate a promising outlook.
6. **J&J Snack Foods Corp. (NASDAQ:JJSF)**
– Dividend Yield: 3.52%
– Market Cap: $1.771 billion
– Despite a year-over-year sales decline, the company remains focused on innovation and strategic growth initiatives.
7. **John Wiley & Sons, Inc. (NYSE:WLY)**
– Dividend Yield: 4.38%
– Market Cap: $1.724 billion
– The recent partnership with IQVIA Holdings enhances its clinical assessment offerings.
8. **HNI Corporation (NYSE:HNI)**
– Dividend Yield: 3.32%
– Market Cap: $1.876 billion
– HNI’s recent merger agreement with Steelcase Inc. positions it for future growth.
9. **Upbound Group, Inc. (NASDAQ:UPBD)**
– Dividend Yield: 8.27%
– Market Cap: $1.092 billion
– The company has shown strong revenue growth, bolstered by strategic acquisitions.
10. **Cogent Communications Holdings, Inc. (NASDAQ:CCOI)**
– Dividend Yield: 15.55%
– Market Cap: $964.965 million
– Despite some revenue challenges, the company is focused on share repurchases and maintaining a strong market presence.
Investors considering these stocks should conduct further research and consider their investment strategies in light of current market conditions and forecasts for 2026. The potential for growth in the small-cap sector, combined with attractive dividend yields, may provide a valuable opportunity for those looking to diversify their portfolios.
