Large, blue-chip dividend stocks are popular with investors due to their sleep-well-at-night qualities and ability to offer attractive, risk-adjusted, long-term wealth and income compounding. However, small-cap stocks have the potential to yield superior total returns. This is due to their higher growth potential and tendency to offer higher dividend yields.

Indeed, small-cap stocks may involve more risk compared to large-cap blue-chip stocks. However, small caps also offer greater potential for total returns along with very high dividend yields. By creating a well-diversified portfolio of small-cap businesses, investors can earn higher current income and have the possibility of achieving double-digit annualized total returns in the long run, without taking on excessive risks.

In this article, we will cover three small-cap dividend stocks that combine attractive long-term total return potential with current dividend yields over 4%.

Ethan Allen Interiors (ETD)

Ethan Allen Interiors (NYSE:ETD) is a company specializing in interior design that operates both online and through a network of approximately 302 design centers. With 84% of its sales coming from its retail segment and 16% from its wholesale segment, including independently owned stores, the company experienced setbacks during the pandemic due to the closure of its service centers. However, it quickly recovered thanks to pent-up demand and fiscal stimulus packages. It is well-positioned to continue capitalizing on long-term work-from-home trends and operates with a build-to-order business model that allows for customization according to customers’ preferences.

Over the past nine years, the company has maintained an impressive average annualized growth rate of 12.9% in earnings per share (EPS). However, due to subsiding excess demand, EPS is expected to dip slightly to $3.50 in 2023. Beyond this year, the company will liekly maintain an average annual growth rate of 2% in its bottom line for the next five years.

In the last decade, the company has consistently increased its dividends by an average of 13.8% per year, and by 11% per year on average over the last five years. The dividend is expected to grow in line with EPS. Furthermore, the company has a 25-year consecutive history of paying dividends, indicating a strong level of confidence in its continued payment. Ethan Allen has maintained an average payout ratio of slightly under 50% over the past nine years. And with expected EPS growth, it is likely to continue to have a low payout ratio in the intermediate term.

While the company has no debt, it is susceptible to economic downturns. Despite not being the most affordable retailer in its markets, Ethan Allen possesses competitive advantages such as vertical integration, North American manufacturing operations and made-to-order products.

With a 4.9% dividend yield, a forecasted 2% EPS compound annual growth rate (CAGR), and an expected 9.3% annualized tailwind from valuation multiple expansion, ETD is poised to deliver exceptional 16.2% annualized total returns over the next half decade.

Northwest Bancshares (NWBI)

Northwest Bancshares (NASDAQ:NWBI) is a century-old bank headquartered in Ohio. It also has branches in Pennsylvania, western New York and Indiana. The bank specializes in personal and business banking, wealth management. It also offers a variety of services such as checking and savings accounts, loans, credit cards and retirement plans. It invests deposits in cash and cash equivalents and provide mutual funds, insurance and annuities as part of its wealth-management offerings.

Community banks typically generate revenue through interest on loans, fees on services and wealth-management fees. Northwest grows its net interest income by adding customers and expanding into new territories through mergers and acquisitions. The bank can also grow by adding more fee-based services and customers for wealth management. This includes commissions or fees for insurance products, trusts, brokerage accounts and the sale of mortgages. Northwest has successfully grown its deposit base and loans, and recent acquisitions have contributed to an increase in both metrics.

Northwest Bancshares’ competitive advantage lies in its focus on community banking, which allows it to build strong relationships with customers through better service. This is particularly important as larger banks move functions online and reduce branch counts. Community banking also keeps money in the local community and results in a positive economic impact.

The company’s earnings have been volatile over the past decade, with a downward trend from 2013 to 2016 and double-digit growth from 2017 to 2019. The CAGR over the past 10 years was 4.1%. Over the last five years, it was 1.3% due to the pandemic. The company is expected to grow earnings at a 5% annual rate for the next five years by optimizing its branch networks and acquiring smaller local banks. The dividend has grown at a 5.4% rate over the past 10 years and 3.3% over the past five years. Expectations are for it to continue growing at a 4.5% rate for the next five years.

With a 6.9% dividend yield, a forecasted 5% EPS CAGR, and an expected 5.5% annualized tailwind from valuation multiple expansion, NWBI is poised to deliver exceptional 17.4% annualized total returns over the next half decade.

Via Renewables (VIA)

Via Renewables (NASDAQ:VIA), formerly known as Spark Energy, is a Houston-based retail energy services company founded in 1999. It serves residential and commercial customers in 19 states and the District of Columbia through their asset-light model, which allows them to offer competitive prices by sourcing power and natural gas. Via Renewables does not produce energy but manages risk and trades energy, which can result in volatile results.

Via Renewables saw its revenue peak in 2018 at $1 billion but has since declined to a current annualized run rate of $400 million. The company has been losing customers for the past five years due to an organic attrition rate that exceeds its organic customer acquisition. To improve its financials, Via Renewables needs to expand its residential customer base and accurately forecast customers’ load needs to hedge their power requirements. Rising electricity costs could also boost profitability. However, the company’s overall growth prospects are speculative and difficult to predict.

Via Renewables lacks significant competitive advantages in the highly competitive retail energy industry. Its business model poses considerable commodity price risks, and the company has low cash reserves of $40.4 million, leaving little margin for error. While there is no immediate debt due in the next year, the company may need to raise capital by issuing shares or debt if it doesn’t generate positive and increasing cash flow. This could destroy shareholder value and further pressure future results. As a small-cap player, Via Renewables’ stock is more volatile and likely to underperform the market during selloff periods.

With a 20.1% dividend yield, a forecasted 6% earnings per share CAGR, and an expected 18% annualized tailwind from valuation multiple expansion, VIA is poised to deliver exceptional 44.1% annualized total returns over the next half decade. However, investors should keep in mind that the company is very high risk. Therefore, the downside risks are nearly as great as the upside potential here.