Small-cap stocks are usually prized for growth possibilities, not income-generating potential. However, more and more smaller stocks are rewarding shareholders with dividends and that theme is accessible via several exchange traded funds, including the ProShares Russell 2000 Dividend Growers ETF (NYSEArca: SMDV).
The ProShares Russell 2000 Dividend Growers ETF tracks the Russell 2000 Dividend Growth Index. The underlying index includes small-cap firms with dividend increase streaks of at least a decade. 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.
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.
A Fed rate hike would also help support the U.S. dollar, which would make U.S. exports more expensive overseas and diminish revenue for larger companies with a bigger international footprint. In contrast, small-cap stocks are focused on domestic markets.