2 Small-Cap Dividend-Paying Retailers to Buy and Hold for 2026

If you want to expand exposure to small caps or capture underappreciated consumer strengths, consider adding retail stocks like Shoe Carnival (NASDAQ: SCVL) and American Eagle Outfitters (NYSE: AEO) to your buy list. Their stock prices surged by double-digits in early September, signalling bottoms and reversals that can drive shareholder value for years.

Among the key takeaways from their reports are outperformance and increased guidance, prompting short sellers to cover their positions, and setting the market sentiment up for improvement in the coming quarters. 

Shoe Carnival Stations Itself for Leveraged Growth

Shoe Carnival’s FQ2 release wasn’t spectacular, with revenue declining by nearly 8% but all other details are bullish. The critical takeaway is that the company’s rebranding efforts are paying off, the new Shoe Station concept will be the bulk of sales by next year, and the balance sheet remains a fortress.

The company has a long-standing tradition of self-funding its efforts through cash flow and cash on hand and maintains a robust balance sheet. At the end of Q2, the highlights include increased cash, assets, and equity, amplified by reduced total liabilities. 

Margin is another crucial detail. The Shoe Station rebranding is driving better comp store sales and wider margins. The company’s gross margin improved by 270 basis points in Q2, driving outperformance on the bottom line, and improvements are expected to continue as Shoe Carnival stores are turned into the better-performing Shoe Station banner and new stores are added.

Another important detail is that Shoe Carnival pays a reliable and annually increasing dividend distribution that annualizes to approximately 2.45% in early September.

The payment is only 25% of the earnings forecast, has increased annually for over a decade, and is running a mid-teens distribution CAGR.

Analyst trends are the worst news, but the bottom in their sentiment decline will likely be in. The trends reveal downgrades and price target reductions leading up to the release, but nothing in the first week following.

The likely scenario is that analysts are now in a wait-and-see mode, waiting to see whether the company can continue to build on its momentum. If so, investors should expect analysts to start reinitiating coverage, lifting their ratings and price targets.

American Eagle Flies High on Performance and Outlook

American Eagle shares advanced nearly 50% in a week after its Q2 results affirmed that the decision to use actress Sydney Sweeney in its ad campaigns was wise. The company’s revenue contracted as expected, but far less than forecasts, outpacing the consensus by more than 300 basis points and the strengths are expected to continue.

More importantly, the revenue strength and less-than-feared impact of tariffs resulted in leveraged bottom-line strength, leaving GAAP earnings up by more than 15% year over year and more than double the consensus forecasts. 

American Eagle is also a solid dividend payer, yielding about 2.65% in early September. The payout was erratic in the wake of COVID-19, but has since stabilized, running at 45% of the earnings forecast in 2025. It is backed up by a healthy balance sheet and cash flow that also allow for aggressive share repurchases.

The company completed an accelerated repurchase plan in Q2, reducing the count by 10% year to date and by more than 13% compared to last year.

The analyst's response to the news was bullish, aligning with the market bottom. MarketBeat tracked five revisions within the first 24 hours of the release, with 100% lifting the price target.

They lead to the high-end range of targets, provide support for the market at its early-September trading levels, and are leading at the high end.

The $21.50 price target is an additional 15% gain and nearly a one-year high, and UBS Group set it. It is unlikely to be the highest target set this year. The guidance for Q3 was improved and may be exceeded, given the company’s momentum and resilient consumer base.

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