Moreover, the dividend yields have recently been fairly competitive with these smaller market segments.
Indexes Indicate Similar Yield Levels:
Trailing 12-Month Index Dividend Yields, As of 1/31/2013
We recognize the inherent differences in methodology and market segments between these particular indexes, but we feel that the one common element—that many people consider these types of asset classes, be it real estate, REITS, MLPs and dividends–as income generators. Through the common theme of “income generation,” we believe there is merit to the comparison, but we acknowledge that people should consider the differences in potential risk profiles between these asset classes when conducting any analysis.
How Much to Allocate?
What would be an appropriate allocation to the mid- and small-cap dividend segments within an income-focused allocation? We believe that a good place to start could be an analysis of the exposure of mid- and small-cap stocks in broad market capitalization-weighted indexes. Of course, every investor will have different investment needs and should work with their investment advisor to determine the right balance for their needs.
Percentage of Market Cap Index: If we look at the Russell 3000 Index—one of the most often-cited measures of large-, mid- and small-cap equities in the United States—17.5% of the index comprises mid-cap stocks (defined here as those with market caps between $2 billion and $10 billion), while 6.6% is in small-cap stocks (defined here as those with market caps below $2 billion), for a combined mid- and small-cap weight of approximately 23%. This is a similar share as what we saw earlier in terms of the proportion of mid- and small-cap allocations across U.S.-focused ETFs.
Percentage of Dividend Index: Within the universe of U.S. dividend payers, and using the same market capitalization breakpoints as the Russell 3000 Index, 13% of the WisdomTree Dividend Index comprises mid-cap stocks and 4% is small-cap stocks.
We believe that these could be good starting baseline allocations. Many people often over-weight mid- and small-cap segments when it comes to their breakdown vs large caps in asset allocation. and the same can be done compared to large-cap dividend ETFs.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
Source for data in this article: Bloomberg, as of 1/31/2013.