As people diversify their portfolios in light of an ongoing low-yield environment, investors may want to take a look at exchange traded funds that track small- and mid-cap dividend growth strategies to potentially generate better risk-adjusted returns.
On the recent webcast, Dividend Growth: Compelling Opportunities Beyond Large Caps, Simeon Hyman, Head of Investment Strategy at ProShares, said that the dividend growth strategy has helped investors enhance returns.
“Dividends are often viewed as a reflection of management confidence in the company’s earnings, balance sheet and performance potential,” Hyman said. “Cutting or suspending dividends is probably one of the things Wall Street hates the most, as it may be a signal of cash flow or debt problems for a company. Paying dividends is generally considered a sign of stability and a commitment from management to returning cash to their shareholders.”
Among dividend paying companies, those that have consistently increased dividends are ranked among an elite group of dividend payers. In recent years, these companies that have steadily raised dividends also outperformed firms that did not. For instance, looking at Russell 3000 companies between 1987 and the end of 2015, Hyman pointed out that dividend growing companies returned an average 13.4%, whereas other dividend payers returned 11.9%, non-paying companies returned 7.1% and dividend cutters saw a 6.7% return.
The dividend growth strategy can also be applied to targeted small- and mid-cap asset categories, which may help investors gain exposure to the potential growth potential of smaller companies while mitigating some of the risk with a more conservative dividend play. Consequently, investors are able to focus on higher quality companies in these smaller capitalization segments without giving up on growth.
“Much of the potential return differential small cap dividend growers have over other small caps can be attributed to lower historical risk,” Kieran Kirwan, Director of Investment Strategy at ProShares, said. “Not only have small cap dividend growers had lower volatility compared with the overall small cap space, they also have had lower drawdowns. It is ‘winning by not losing as much’ that has translated to better returns over time.”
For instance, Kirwan pointed out that the Russell 2000 Dividend Growers Index includes quality, dividend-growing small-cap companies that delivered higher return on equity compared to other small-caps, and these quality dividend payers did so without sacrificing earnings per share growth.