• Small Caps for Income – When investors think of dividends, they tend to think of mature large-cap companies as their primary source. As a result, we feel that many investors mistakenly overlook small-cap equities as attractive income options. I find it impressive that the WisdomTree SmallCap Dividend Index (WTSDI) has almost twice the weight of the S&P 500 in stocks with a dividend yield higher than the 10-Year Treasury—over 60%.
The Dividend Advantage
Bonds, of course, offer just a fixed income stream, but dividend-paying equities can offer the potential for income growth through dividend increases. We continue to see broad-based dividend growth among the constituents of the WisdomTree Dividend Index discussed in detail here. Further, S&P Dow Jones Indices recently announced that a record number of U.S. companies reported dividend increases during the first quarter of 2014. Howard Silverblatt, senior index analyst for the company, stated, “Increases outnumbered decreases more than 10-to-1, as $17.8 billion in net increases were declared by U.S. domestic issues. Payments for the first quarter are estimated to have increased 15% over the first quarter of last year. Payout rates, which historically average 52%, continue to remain near their low at 36%.”2
Conclusion
As equity markets and interest rates forged higher last year, investors repositioned out of defensive higher-yielding equities and into higher beta stocks to try to capture the upside return potential. With interest rates falling year-to-date and the broad equity markets mostly sideways, investors have become more constructive on the importance of dividend income. At WisdomTree, we have always considered dividends an important component of total return, and feel diversified portfolios can typically benefit from dividend-paying equities across many different market environments.
For individuals who are bullish on the equity markets, we would highlight our preference for equities with higher dividend growth characteristics over equities with higher yields, and also look past large caps into the small- and mid-capitalization dividend-paying markets. For those more cautious on the equity market, we would focus their attention on higher-yielding defensive equities.
112/31/13–4/11/14.
2“First Quarter 2014 Sees Record Number of Dividend Increases,” S&P Dow Jones Indices, 4/9/14.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.