Investors looking for high dividend yields will likely focus on large-cap stocks. But income investors should not ignore small-cap dividend stocks, as they may have stronger growth potential in addition to their dividend yields.

The Russell 2000 Index is the world’s most well-known index of small-cap stocks. Generally speaking, small caps have market capitalizations below $2 billion. 

These 3 small caps have market caps below $2 billion, meaning they could have impressive growth in their future. But they also reward shareholders in the near-term with above-average dividend yields.

Cass Information Systems (CASS)

Cass Information Systems, Inc. (CASS) offers payment and data processing services to US-based manufacturing, distribution, and retail businesses. In addition, Cass offers invoice rating, payment processing, auditing, accounting, and transportation information services. The company operates in two segments: Information Services and Banking Services, generating most of its revenue from the Information Services segment. 

On January 25th, 2024, the company announced its Q4 2023 results, posting Q4 non-GAAP EPS of $0.61, which beat estimates by $0.13 and total revenues of $50.53 million, up 2.2% year-over-year. In Q4 2023, ManpowerGroup reported a 17.3% decline in transportation dollar volumes to $9.0 billion, attributed to lower average transaction values due to decreased fuel costs and freight rates. Conversely, facility expense dollar volumes increased slightly by 0.7% to $4.8 billion, influenced by seasonality and energy prices. 

Additionally, Processing fees rose by 7.5%, driven by higher ancillary fees and facility transaction volumes, despite a 4.8% fall in transportation invoice volumes due to a freight recession. Financial fees modestly increased by 1.0%, benefiting from higher short-term interest rates, while net interest income decreased by 1.7% due to reduced interest-earning assets despite an improved net interest margin of 3.30%.

Cass has continued to do well over the past two years benefiting from high inflation and rising interest rates. The company benefits from rising inflation as the company's main business of processing payments sees higher transaction dollar volumes during periods of high inflation due to a rise in utilities and labor costs for businesses.

Cass has a healthy payout ratio and has increased the dividends at a CAGR of 2.8% from 2019- 2023. The Company has continuously paid regularly scheduled cash dividends since 1934 and has increased its annual dividend for the past 23 years.

Middlesex Water (MSEX)

Middlesex Water Company was formed in 1897. The company is a water and wastewater utility in New Jersey and Delaware. Middlesex has paid consecutive dividends since 1912 and has reached its 51st consecutive year of dividend increases. As a result, MSEX is a Dividend King.

On February 29, 2024, the company reported financial results for the fourth quarter of 2023. In the fiscal year ending December 31, 2023, consolidated operating revenues rose to $166.3 million, marking a $3.8 million increase from 2022. This growth was driven by various factors including a net $4.2 million increase in Middlesex System revenues due to the final phase implementation of a 2021 base rate case increase and additional revenues from the Purchase Water Adjustment Clause rate. Earnings applicable to common stock totaled $1.76 per share on a fully diluted basis, down from $2.39 per diluted share in 2022.

We see annualized earnings-per-share growth for the next five years in the mid-single-digits as the meaningful sources of growth will be the rate increase in New Jersey and inflationary pressures. Adding customers will also help some as it will also improve operational efficiencies through economies of scale.

Middlesex has the balance sheet to weather virtually any economic storm so there is no question of safety, but obviously growth remains an issue. The payout ratio is 58% for 2024, making the dividend very safe. MSEX stock currently yields 2.7%.

Atrion Corporation (ATRI)

Atrion Corporation develops and manufactures products for medical applications. The company's medical products are used in several fields, including cardiovascular, fluid delivery, and ophthalmic applications. Its fluid delivery products and cardiovascular products make up a large portion of overall sales. It also has ophthalmic products including medical devices that disinfect contact lenses. 

On February 29th, 2024, Atrion Corporation announced its Q4 2023 results, posting non-GAAP adjusted diluted EPS of $3.65, compared to $4.70 for the fourth quarter of 2022, and total revenues of $43.6 million. The full-year figures showed a more pronounced downturn, with revenues falling 8% to $169.3 million and net income dropping 45% to $19.4 million, culminating in a diluted EPS of $11.02. 

Despite the setbacks, Atrion has a positive EPS growth outlook, with measures including maintaining workforce levels, renewing multi-year supply agreements, and expanding its product pipeline and factory capabilities. For 2024, Atrion expects a high single-digit revenue increase and an improvement in operating income in the second half of the year.

As inflation normalizes and interest rates peak, we expect the company to stabilize margins. In addition, Atrion Corporation's new company-wide ERP system and a sizable expansion of the Florida facility will enable the expansion of capacity and meet higher demand. With production of MPS 3 consoles at record levels and new partnerships underway, Atrion anticipates a return to growth in 2024, expecting a high single-digit revenue increase and improved operating income in the latter half of the year, supported by a debt-free position and significant cash reserves.

ATRI has increased its dividend payment to shareholders for 21 years. The company's five-year average payout ratio stands at 30.4%, and the company has been able to grow dividends at a compound annual growth rate of 48.6% during this time. ATRI stock currently yields 2.1%.