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.
SMDV “allocates its roughly $115 million in total assets among a minimum of 40 different names (it currently has positions in about 60 names). The fund starts by applying liquidity and tradeability screens prior to identifying stocks with the necessary dividend history. It equal weights all names that it qualifies for the portfolio making sure that no individual sector comprises more than 30% of total assets,” according to a Seeking Alpha analysis of the ETF.
As the broad equities market pushes toward new highs, riskier assets like small-caps have been able to rally back much quicker. When the economy is doing well and the markets rally, we see sentiment for more nimble smaller companies improve and outperform those of their more languorous, larger peers.
“While small caps in general are risky, the focus on long-term dividend payers takes a significant amount of risk out of the portfolio. By targeting long-term dividend growth names, the valuation metrics of the portfolio look fairly similar to those of their large cap counterparts,” notes Seeking Alpha regarding SMDV.