Small-cap stocks have finally started to wake up lately, which could be a bullish sign as we head into 2026. Let’s remember that a smaller market capitalization does not necessarily mean a diminutive dividend—today we’ll discuss four small caps that yield between 7.1% and 13.3%.
It’s been a “lost decade” for small caps, which have lagged their larger brethren. 2020’s COVID reopening rally in small caps was intense but short-lived—rising interest rates, renewed interest in safer mega-cap stocks after two bear markets in three years, and a rush into predominantly large-cap AI stocks have left small caps on the outs going into this year.
But when Wall Street turned its attention to the Fed’s rate cuts, investors began to swoop up these unloved small cap stocks:
Small Caps Finally Gain on Large Caps
Small companies tend to benefit even more from lower borrowing costs. So, as the Fed continues to chop, small caps may continue to see more love. Let’s sort through this four-pack of divvies to see which may benefit the most from continued rate cuts.
Nuveen Churchill Direct Lending (NCDL, 13.0% dividend yield) is a member of one of Wall Street’s highest-yield industries: business development companies (BDCs). These companies provide financing to small businesses, and like REITs, they’re required to pay back at least 90% of their earnings as dividends—massive dividends, as it turns out, with high-single- and double-digit yields the norm.
NCDL’s giant yield primarily comes from a high regular dividend, but it also pays special “supplemental” dividends that help top up that headline number. Though it has since replaced these with a traditional payout schedule.
NCDL’s Journey to a Regular Dividend
Those supplemental payments were declared in connection with its 2024 initial public offering (IPO) and haven’t been continued. Still, the regular dividend remains, and remains high, so let’s dig a little deeper.
NCDL, like a number of other BDCs, is attached to a big-name asset manager—two, in fact: fund manager Nuveen and its parent, TIAA. Nuveen affiliate Churchill manages the fund, and it currently finances 213 companies across 26 industries. Most of its portfolio involves first-lien debt (90%), though it also deals in subordinated debt (8%) and equity co-investment (2%). And like with many BDCs, most (94%) of that debt is floating-rate in nature.
And that’s the rub, because BDCs have a complicated relationship with Fed rates.
On the one hand, when the Fed cuts its policy rate—the pacesetter for the rate at which financial institutions lend to each other—BDC loan income typically declines, especially from floating-rate loans. But on the other hand, lower rates also drive up loan demand, especially when businesses plan to grow, which lower borrowing rates help small businesses do. That helps offset lower loan income and gives BDCs more floating-rate loans (whose income will gain when rates rise again).
Nuveen Churchill Direct Lending is young, so its 18% discount to net asset value (NAV) could be a juicy bargain, or it could be the baseline of a BDC that generates little investor interest and remains perpetually low-priced. If it keeps up a run of disappointing quarters, NCDL could very well be the latter.
Normally, if we see a high yield in the mortgage space, we naturally assume we’re dealing with a mortgage real estate investment trust (mREIT). But UWM Holdings (UWMC, 7.1% dividend yield), while a home lender, isn’t structured as a REIT.
The Michigan-based company, which offers mortgage loans through a wholesale channel, is America’s largest home mortgage lender. And it has been for years, enjoying an 8% share of the overall lending market, and a 43% share of the wholesale lending market.
As a mortgage lender, UWMC is more of a long-rate play. In general, lower mortgage rates help drive volume while higher rates generally dry it up. This stock wants lower mortgage rates!
It’s Not a Perfect Relationship, But UWMC Clearly Favors Moderating or Falling Rates
UWM is ready for them. It has poured money into additional headcount and tech spend as it brings its servicing platform in house—something CEO Mat Ishbia believes will allow the company to ramp up scale as rates drop further: “The 10-year dipped to 4%, and you saw what we did,” he said during the company’s third-quarter earnings call. “I’ve been saying this for years: When the 10-year dips to 3.75%, we’re going to double our business.”
Shares aren’t dirt-cheap at 13 times 2026 earnings estimates, but they’re hardly priced for perfection. The current rally has shaved its premium yield, but UWMC still pays a respectable 7%.
The biggest yields in the mortgage space still belong to mREITs, though.
A reminder: Mortgage REITs aren’t like equity REITs. They don’t own property—they own paper. So their business model is pretty straightforward: They borrow money at short-term rates to buy mortgages, which pay the mREIT interest at (hopefully, and usually, higher) long-term rates. The ideal scenario for these companies is for short-term rates to decline and long-term rates to hold steady or move lower, which makes their mortgages—issued when rates were higher—worth more.
Redwood Trust (RWT, 12.7% dividend yield) is an originator of jumbo residential mortgages and single-family rental loans. In recent years, it has leaned more heavily on its Sequoia correspondent jumbo loan platform; its Aspire home equity investment options (HEI) and expanded loans platform; its CoreVest residential investment property origination platform; and its Redwood Investments portfolio of residential housing investments, which are sourced from the aforementioned platforms.
Increased focus on these businesses, and a shift away from its legacy investments (multifamily bridge loans and third-party assets), should serve Redwood well, and earnings are expected to improve across 2025, 2026 and 2027.
Wall Street might be skeptical. Interest rates have propped up RWT shares of late, but even with dividends included, the stock is barely breakeven over the past five years. The good news? Redwood has taken advantage of its heavily discounted stock, which trades at less than 7 times next year’s earnings, to repurchase 5% of its outstanding common shares since June.
Redwood Has Been (Mostly) Good About Buying Low and Abstaining High
Also, regular readers know that Redwood is on “dividend growth watch.” The company cut its payout in 2023 but has delivered a pair of small rebound hikes since. It has been a year since its last one, however, so I’m eyeballing its usual mid-December announcement to see if it signals optimism with another raise.
Franklin BSP Realty Trust (FBRT, 13.3% dividend yield) is a more traditional mREIT, this one dealing in commercial mortgage-backed securities (CMBSs) primarily in the American Southeast and Southwest. The core portfolio is 75% multifamily, but Franklin is happy to go anywhere for a deal—its CMBSs include mortgages related to hospitality, industrial, office and other real estate. All but 1% of its portfolio is senior debt, and 88% of its debt is floating-rate.
This is a second glance at FBRT this year—I examined it in June, too. At the time, it was trading at a 28% discount to book and 7 times 2026 earnings estimates. Now it trades at a 23% discount and about 8 times estimates.
But That’s Not Because Franklin’s Shares Went Anywhere
Instead, we can blame both a lower book value and a downgrade in earnings estimates after a weaker-than-expected Q3.
But that same Q3 report had a glowing silver lining. I mentioned before that Franklin was set to close on the acquisition of a privately held commercial real estate finance company, NewPoint Holdings JV LLC, in July. It did, and a strong quarter of originations helped NewPoint contribute $9.3 million to FBRT’s distributable earnings—a great starting signal of the business’s potential.
The dividend remains the biggest question mark, and even more so now after the weak Q3. The payout hasn’t budged for years, and Franklin has failed to cover the 36-cent dividend over the past few quarters. If FBRT can get over its short-term hump, NewPoint could lead the company to more acceptable dividend coverage.
You Saved and Saved—And Think You Still Can’t Retire? Think Again.
Most of these BDCs and mREITs have the home-run dividend yields we need to retire on dividends alone. But they don’t necessarily have the other vital part of the retirement equation: a predictable income stream.
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