Small-capitalization stock exchange traded funds that follow a dividend theme may have a greater value tilt, providing relatively cheaper valuations compared to the broader market.
For instance, the WisdomTree SmallCap Dividend Fund (NYSEArca: DES) offers investors exposure to small-cap dividend growth. DES tracks the WisdomTree SmallCap Dividend Index, which is comprised of small-capitalization stocks weighted by cash dividends each component company is projected to pay in the coming year.
The appreciating U.S. dollar is taking its toll on larger companies’ revenue with significant overseas exposure. On the other hand, mid- and small-cap exchange traded funds track companies that expand with the growing U.S. economy. The nearly 680 companies in DES are pulled from the WisdomTree Dividend Index after the 300 largest market value firms are removed. The WisdomTree Dividend Index is the underlying index for the WisdomTree Total Dividend Fund (NYSEArca: DTD).
“The annualized volatility on DES was materially higher at 27% compared to 21.1% for SPY, and during the market crash, the shares had a max drawdown of 65.6%, which is fairly massive. Since then, the ETF has not been able to catch up with SPY, which may largely be a function of how severe the losses were during the downturn,” according to a Seeking Alpha analysis of DES.
Importantly, small-cap ETFs are becoming credible sources of dividend growth.
As S&P Dow Jones Indices notes, companies initiating dividends typically only do so if they intend to keep paying a dividend in the near future.From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research. [Dividend Growth Via ETFs]
Although small-cap indexes remain at the low end of the dividend yield totem pole, more than half of IJR’s holdings are dividend payers and there is room for steady payout growth as “182 payers have a dividend rate less than 50% of their 12 month net GAAP income, with 235 being less than 75%,” according to S&P Dow Jones Indices.
“DES offers investors a fairly substantial dividend yield on small capitalization investments. For the dividend-focused investor, this is a viable way to get access to smaller capitalization companies, but it does have a very significant amount of volatility, so investors would be wise to ensure that the position is used as part of a larger diversified portfolio,” adds Seeking Alpha.
WisdomTree SmallCap Dividend Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.