The Dividend-Paying 2-Bagger

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What's better than a dividend stock paying better than twice the market average? An undiscovered small-cap stock with a proven leader at the helm. Even better, this company is poised to take advantage of the great values in real estate, the industry investors love to hate right now. But they won't always feel that way, and when real estate returns to favor, this company will be gushing an ever bigger dividend and will sit atop a pile of attractive assets.

Three great tastes together
What would your ideal stock look like? You'd want a security that had multiple ways to win, one that's in the sweet spot where massive outperformance resides: a great value, dividend-paying, and underfollowed.

Legendary investors such as Warren Buffett and Seth Klarman have shown the wisdom in value investing. Over the long term, value investing wins, because you can take advantage of the market's short-run thinking and psychological biases. And significant research has gone into showing why this investing style works.

And a value stock that pays a dividend that trounces the market? Sounds even better. Above-average dividend payers have been shown to provide attractive total returns over the long term, so you should love those quarterly checks.

Now, imagine combining the power of value and dividend investing with stocks that not everyone and their Aunt Sally knows about, such as small caps or what we call hidden gems. As I've shown here, such small caps may be followed by just one or two analysts, compared to dozens that follow the average megacap stock. Small caps can truly offer advantageous mispricing for individual investors like you and me. Because they're smaller, they can have huge opportunities to grow, something the big guys don't have.

Add them all together and you get Retail Opportunity Investments Corp. (NAS: ROIC) , or ROIC, for short.

Meet the 'rents
ROIC operates as a real estate investment trust and its market cap sits at a modest $546 million, firmly in small-cap territory and just a lone analyst follows this REIT. ROIC is growing its portfolio quickly.

Under veteran real estate investor and CEO Stuart Tanz, ROIC is snapping up bargain-priced shopping centers on the West and East coasts like consumers at a Black Friday sale. Unlike mortgage REITs and dividend highfliers Annaly Capital (NYS: NLY) and Chimera (NYS: CIM) , which own interests in mortgage securities, ROIC actually manages its properties.

Tanz has a strong history in the industry and is a value investor himself. He built Pan Pacific Properties into a $4.1 billion company and earned early investors nearly 800% on their money in just 10 years, after selling out to Kimco Realty (NYS: KIM) near the market top in late 2006.

By owning shares of ROIC, you have Tanz working as a value investor for your own portfolio. He's on the lookout for cheap retail property in populous and affluent areas, those with 100,000 or more people inside a five-mile radius making at least $60,000. Even better, because of his industry connections, he can snag the hidden real estate gems for himself (and us), the sweetest deals that aren't available to most investors.

Once he's acquired a property, Tanz invests in and beautifies it, increases occupancy, and then sells the property for a higher price. ROIC's shopping centers feature quality clients, including high-traffic grocery stores and other publicly listed companies that are frequently visited by consumers. In its most recent quarter, the company was still on the hunt, purchasing six locations and inking deals for two others.

And unlike much larger peers such as General Growth Properties (NYS: GGP) , Weingarten Realty (NYS: WRI) , and Vornado Realty (NYS: VNO) , just a few acquisitions can dramatically increase ROIC's revenue. In other words, ROIC doesn't need to find that many sweet deals in order to double its revenue base of $43 million. Vornado and General Growth need several billion in additional rents, and Weingarten requires nearly $600 million. That's another advantage of focusing on small caps.

And what is all this worth? Motley Fool Income Investor advisor James Early pegs shares to be worth as much as $23 a stub -- a solid double from recent prices.

And as for that dividend? It stands at 4.3% now -- more than double what you'd find in the average S&P stock. But it's been growing furiously in the past 18 months, doubling since March 2010. ROIC's current quarterly dividend is just 46% of funds from operations (a REIT's measure of cash flow), meaning that there's still plenty of room to bump the payout at a substantial clip in the coming years as all those newly improved properties gush cash.

Tanz and ROIC have managed all this in the face of one of the worst economies in the last hundred years. But more is on the way. In fact, I'm so convinced by the massive opportunity in front of ROIC, that I'm going to put my own cash on the line, as the Fool's trading rules permit.

Foolish bottom line
If you like great stocks with dividends, consider ROIC along with the 11 names from a brand-new free report from Motley Fool expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. Get instant access to the names of these 11 high yielders -- it's free.

At the time this article was published Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Chimera, Annaly, and Retail Opportunity Investments.Motley Fool newsletter serviceshave recommended buying shares of Retail Opportunity Investments. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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