How do you get income with declining interest rates? From ASX Dividend Stocks. In Australia and the rest of the developed economies, interest rates are declining to close to zero at all points of the yield curve, indicating how low expectations are for economic growth. But you’ve got to get income somehow. If not, you might have to live off your capital, which is not too bad if it’s growing. If it’s not, then you need yield. Our ASX dividend stocks and portfolios have delivered strong cash returns as well as capital appreciation. Best ASX Dividend Stocks: Small Caps To emphasise what I’m talking about, find me a term deposit that has a rate above 2.5% and your money is locked up for a period. You can’t get 2% from a govt bond. Even if you do, you’re taking price risk. If interest rates go up, the value of your bonds goes down. Close to 50% of the small caps Under the Radar Report covers pay dividends and the average dividend yield is for those ASX dividend stocks is 4%. Under the Radar Report has produced six Small Cap ASX dividend stock portfolios. Mistakes, we’ve made a few, but the point is that the combination of dividends and diversification has worked. On average these dividend stock portfolios have generated a return of 12.5% a year, which compares to the ASX All Ords Accumulation index (includes dividends) annual return of 9.5% and the ASX Small Ords average annual return of just under 6%. In the table above we show you a recent ASX dividend stock portfolio from October 2018, which returned 19% over the past year versus the ASX All Ords 10%, but first three small cap ASX dividend stocks for you to consider. THREE of the ASX's BEST Dividend Stocks ASX Small Cap: MyState (MYS) - $4.63, forecast dividend yield 6.2% The Tasmanian based small cap lender is no AfterpayTouch, but its FY19 result demonstrated the small cap's consistent profitability from which it pays big dividends, which is why this ASX small cap has been a perennial inclusion in our Best ASX dividend stocks and portfolios. As expected the small cap's final fully franked dividend was maintained at 14.5 cents, taking the full year to an unchanged 28.75 cents. With the small cap company growing home loans at twice the market rate it was good to hear management is going to further increase its focus net interest margin management. That is, not sacrifice profitability for growth’s sake. ASX Small Cap: Auswide (ABA) - $5.75, forecast dividend yield 6.1% The Queensland based ASX small cap regional lender’s origins date back to 1966 when it was the Burnett Permanent Building Society. Over time it evolved into its current form via a number of amalgamations with other building societies. The ASX small cap bank primarily serves the retail customer segment and provides the typical range of financial products including deposits, home loans, credit cards, insurance and superannuation. With a strong capital position and sound asset quality we believe ASX small cap stock Auswide should be able to at least hold the FY19 fully franked dividend of 34.5 cents in FY20 assuming the economy doesn’t fall off a cliff. At current levels the small cap represents reasonable value trading at an estimated FY20 PE about 13 times and paying a forecast 6% yield which is particularly appealing in a low interest rate environment. ASX Small Cap: Gale Pacific (GAP) - $0.30, forecast dividend yield 6.8% This ASX small cap stock has the highest dividend yield of the three, which accounts for the greatest risk. Diversification is your friend when you go up the risk cover. We have covered the small cap shade cloth manufacturer for a long time, so we know the business well, which is solid but cyclical, selling its products to major markets in North America and Asia. It has a strong balance sheet with net debt of $25m and has paid dividends fairly consistently. You wouldn’t bet the house on it, but you could buy it for a bit of income that could help pay some bills. If you’re looking for $200 a year in income you buy 10,000 shares for $3000 you’re getting 1 cent a share in dividends every six months. Read more about our Best ASX Dividend Stocks ASX DIVIDEND STOCKS PORTFOLIO ANALYIS In Under the Radar Report’s Stock Report Issue # 368 we present a portfolio of ASX Dividend Shares that we are recommending given current conditions as well as the criteria that we use to select the best ASX dividend stocks for a portfolio. Below are some take-outs from having invested for dividends over a long period. The power of diversification, which evens out individual returns. We had a poor performers including Capral (CAA) which weighed on the portfolio, but this has been more than made up for by stocks like Ruralco (RHL) and Ingenia Communities (INA) which have produced average annual returns of close to 50%. Takeovers a feature for ASX Dividend stocks Three ASX dividend stocks in our October 2018 dividend stock portfolio have been taken over. You would prefer to takeover a company with a strong balance sheet, meaning net cash or little debt than one with material debt levels, representing an increased cost to the purchaser. It’s no accident that one of our criteria is a strong balance sheet, complimented by good operating cash flow. Capital return does the heavy lifting in the short-term. The cash yield is relatively stable but most of the return comes from the overall uplift in the price, which is what happens in the short-term. Consider re-investing dividends for the long-term. If you re-invest your dividends this will work to supercharge your returns over the long-term. Albert Einstein is rumoured to have said that compound interest is the eighth wonder of the world, but we doubt this. Even so, you can see its effect when you reinvest dividends. If you invested $1000 and achieved an 8% annual return every year over forty years, made up of 3% dividends and 5% capital gain, this would have appreciated to $21,720 with re-invested dividends and $7,040 without them. Dividends aren’t everything. A strong balance sheet is more important. We have invested in a number of small caps (including two in media and one in contracting) that made efforts to repair their balance sheets by forgoing dividends. These ASX small caps subsequently delivered great cash flow. Do not be overexposed to any one sector in the ASX Share market The great thing about Small Caps is the variety of different sectors on offer, which is sharply contrasted by the concentration of exposure in the ASX 200 to banking and resources. The mistake we made was investing in two companies in the one sector (media) – you do not need to be overexposed in any one sector. One final comment on ASX Stock dividends Dividends represent an important price signal for investors. When there is increased uncertainty and the market comes under pressure, if the ASX small cap is able to maintain and even increase dividends, this augurs well for your portfolio’s ability to weather the storm. Things do change. Circumstances change for all companies. Under the Radar Report’s team of independent share analysts monitor what’s going on at the operational level and what’s going on at the price level. Let us worry about when to BUY, SELL or HOLD your ASX Stocks, because these are not set and forget investments. Read more about how we find the best ASX dividend stocks for our subscribers and how you can too.