For many investors, the safest course of action is sticking to blue-chip stocks for both growth and dividends. The growth and dividends may be conservative, but the underlying business models and the safety and predictability they offer nicely balance what you may lose in return potential.
This is sound logic for the most part. Still, it’s essential to understand that you can have industry/niche leaders and stable businesses in small-cap and volatile, unpredictable securities in the large-cap segment of the market. Many small-cap stocks offer excellent return potential, and overlooking them might not be the wisest thing to do.
A small-cap growth stock
TerraVest Industries (TSX:TVK) has recently graduated from small-cap to mid-cap segments, but it has very humble origins. The company is part of the energy sector since most of the products in its original portfolio were for various energy sector needs.
This includes storage and transport products for LPG, NGL, ammonia, and industrial gas. They also offer storage solutions and tanks for other gasses and fluids and services directed at the energy sector.
However, it has emerged as a promising name in the home heating industry in Canada in the last few years. It’s still a B2B business that targets HVAC wholesalers in North America and has an impressive product range under the home heating banner.
TerraVest’s growth has been phenomenal. It has risen over 866% in the last five years, and the growth momentum has accelerated in the previous couple of years. The company shot up over 200% in the last 12 months alone. It pays dividends, too, but the yield has fallen below the 1% mark thanks to its growth pace.
A small-cap dividend stock
Dividends are particularly where most investors lean more heavily towards large-cap companies, but in doing so, they tend to miss out on compelling picks like MCAN Mortgage (TSX:MKP). The company, now rebranded as MCAN Financial, offers a range of financial products to different customer segments, is still mainly a mortgage company, and generates most of its revenue from this business line.
MCAN is a robust dividend stock. It offers an impressive 8.5% yield and has steadily grown its regular payouts for the last few years. The company also issues special dividends sometimes, and historically, it has been quite generous.
The stock has also seen decent growth — about 20% in the last 12 months. At this pace, it may double its investors’ capital in the next five years. It’s also quite attractively valued and has a price-to-earnings ratio of just eight.
Foolish takeaway
The two small-cap stocks are powerful picks in their respective return categories: growth and dividends. They are also well-known players in their respective fields, especially Terravest. MCAN’s performance is impressive, considering how saturated the residential mortgage market is, with the banking giants covering its bulk.