That’s a nice promise, eh? A 10% dividend sounds just lovely right now … not that there aren’t a lot of 10% yielders around, of course, but perhaps this one is special?

That’s what Ian Wyatt thinks, at least — he runs SmallCapInvestor PRO, and he’s telling us to look for small cap companies that pay good dividends. And of course, he’s teasing … his newsletter costs $195 (that’s the special “individual discount”, naturally — does anyone ever actually pay the “retail price” that newsletters claim to charge?), and as soon as you cough up the dough he’ll tell you about two of his favorite high-yield small cap stocks.

Your friendly neighborhood Stock Gumshoe, of course, will just read those clues, sniff out the name of the stock, and tell you for free. Why? Um, because that’s what I do, I guess … and it’s fun. If you don’t feel right about it being free, well, I’m always delighted to have new Irregulars on board.

Today I’m looking at the first stock he teases, this Pennsylvania energy company that yields 10%. Here’s the tease, chock full of delicious clues:

“How do you best play the inevitable bull market in energy?

“One small company from Pennsylvania just answered that question when they announced their latest dividend…

“This company is sitting on close to $140 million in cash reserves, and after 19% growth in the past year, it’s no wonder they’re paying out most of it to their shareholders.

“More to the point, they’ve guaranteed to pay out a 10% dividend starting February 2, 2009.

“That means an $1,880 payout for every 1,000 shares – or $9,400 for every 5,000 shares.

“And the good news is, they plan on doing the same thing in April 2010, then again on July, November and February of 2011….

“Obviously, the amount for each dividend check depends on how much you invest initially, but with oil and energy prices on the rise, we expect the dividend to at least keep pace.

“And this company is uniquely situated for growth because it’s hedged in several different energy sectors across half a dozen locations throughout the U.S.

“In the past year, companies cut their dividends at the fastest rate since 1938. That makes these dividend superstars especially attractive.

“And you’ll notice that most of the time a company is paying a solid dividend, it’s almost never a large cap, blue-chip type. They’re almost always small caps – like the company I’m recommending right now.”

So that’s a bit of a start — we know they’re in Pennsylvania but have businesses spread across a few states, they pay a dividend of $1.88 a share. More?

“It’s a $900 million market-cap company, and it manages coal and natural-gas properties and pipelines (over 4,000 miles’ worth) throughout the United States….

“The current management of this particular company are also some of the original founders, and they still own almost 40% of the business. That means they have skin in the game. The reason they pay dividends is because the company is making money and they feel comfortable distributing profits. With a 40% stake, they’re not likely to fritter away cash-flow just to draw attention to the stock.

“With coal and natural gas prices near their all-time lows, it’s amazing that this company is profitable at all. Indeed, many of its less well-run competitors are hurting right now. That means that if you buy this company today, the upside is huge.

“And while we wait for the upsurge in energy prices, we can collect a 10% dividend.”

OK, so that’s what Wyatt says he thinks. What do we think?

This stock is almost certainly Penn Virginia Resource Partners (PVR)

Penn Virginia is a Master Limited Partnership (MLP) that owns coal reserves and collects royalties from the operators of those coal mines, mostly in Appalachia, and owns natural gas processing pipelines and plants, mostly in Texas and Oklahoma. The pipelines do add up to a bit over 4,000 miles, according to the company, and their market cap has recently been near $900 million (it’s now right around one billion, shares have climbed a bit).

And yes, they do have a current distribution (which they’re trying to keep steady right now) of $1.88 per year, payable quarterly (so yes, you can “start” collecting your near-10% dividend next quarter, but it’s 10% annualized, the next dividend should be 47 cents per share). I haven’t checked to see if February 2 has really been declared as the next ex-dividend date or record date, but it will probably, if history is any guide, be within a week or two of that day. The actual effective yield at the current share price of $20.09 is actually 9.6%, close enough. The one caution I’ll give you is that the $140 million in cash is not a match for PVR, I don’t know if that’s an old number or a mistake or if I’m somehow wrong on this one (neither PVR, nor its general partner PVG, nor parent company PVA has a cash balance that’s close to that amount currently), but with everything else matching perfectly, including the $1.88 annual dividend, I’d be shocked if this wasn’t the match for the teaser.

I’ve written about MLPs many times before, most recently when Elliott Gue was teasing them as “401(r) Royalty” investments, so you probably know the drill — these are partnerships that are publicly traded, designed to avoid taxes for the company and pass them along to the unitholders (that’s you) by paying out all their earnings as dividends, and they pay out far in excess of their earnings, usually, so they are effectively letting you defer taxes on much of your distribution income until you sell the shares/units.

And they are popular with individual investors largely because of their status as tax-deferred income investments that pay a comparatively high yield (compared, that is, to bonds or REITs or other available income investments) — so Wyatt is being facetious when he says “The reason they pay dividends is because the company is making money and they feel comfortable distributing profits. With a 40% stake, they’re not likely to fritter away cash-flow just to draw attention to the stock.”

I’d call that “hogwash” — these companies exist to create an income stream, they’re not electing to pay high dividends just because they’re doing so well, if they stop paying a good dividend the units will collapse in value.

That’s not to say that Penn Virginia is a bad investment — it’s an interesting one, certainly, and it’s somewhat unique in combining the natural gas gathering and the coal royalties, so you do get exposure to two energy commodities in one pick, though it’s indirect exposure (the coal royalties are on pretty long term contracts, and natural gas gathering and processing is usually fee-based, though volumes might pick up if higher pricing encourages their clients to ramp up production). There are lots and lots and lots of other MLPs that also do natural gas pipeline transportation, gathering, and midstream processing, though my personal preference in that sector is to be more cautious and rely on the big MLPs that have diversified national operations and don’t depend as much on just gathering and processing but also have interstate pipelines (those big guys, which I mentioned in the 401r article, also generally have yields that are a couple percentage points lower, more like 7.5% now).

And in coal, too, there are a couple other options — if you like the idea and are interested in researching further, the other two coal MLPs that I’m aware of are Alliance Resource Partners (ARLP) and Natural Resource Partners (NRP).

So that’s one small cap high-yielder, though it’s not that terribly small … and it has a yield that’s really right in line with its peers — if you want something slightly sexier, you could also look at the General Partner for Penn Virginia, called Penn Virginia GP Holdings (PVG), they manage the partnership and get special incentive distribution rights, so the expectation is that they’re a bit leveraged to PVR, if the MLP increases it’s distributions or performs better, the GP gets a boost (the reverse could easily be true if things go down, the actual pass-through of the basic partnership distribution from the PVR units that PVG owns would create a lower yield than PVG currently pays if it weren’t for the incentive rights). The gap between PVG and PVR has grown in recent months as PVR has recovered a bit more strongly, so a gambler might expect that gap to narrow, but PVG does trade in lower volume and carry some additional risk — which is why the yield is also a bit higher, at 10.7% at the moment. I can’t promise what will happen with these stocks and I haven’t researched the PVG incentive rights very thoroughly, but it may be worth looking into if you’re interested in PVR.

And, as always, we’d love to hear what subscribers think about Ian Wyatt and his SmallCapInvestor Pro newsletter — to review it or see other reader reviews, please click here.