With fears of a recession rising, investors considering smaller stocks should focus on quality, an objective that can be accomplished with the ProShares Russell 2000 Dividend Growers ETF (SMDV).
SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade. With leverage a concern and some smaller companies struggling to attain profitability, the current market environment underscores the importance of a quality approach to small caps.
“Because many of the companies are in earlier stages of their growth, there is a much greater proportion of money-losing businesses in the small-cap index than in the large-cap. In other words, they are the first businesses to fall into trouble during a recession,” reports Nicholas Jasinski for Barron’s.
Beating The Storm
Along with the focus on smaller companies, investors should also look to dividend growers to potentially enhance long-term returns.
Specifically, investors should consider quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders and management team conviction in their businesses.
“As a whole, the Russell 2000 certainly is a riskier bet going into a possible recession than is the S&P 500. Smaller businesses tend to have tighter margins and potentially less of an ability to control costs given smaller scale than large-caps,” according to Barron’s. “The Russell 2000 also has a relatively higher aggregate debt load than the S&P 500, as years of ultralow interest rates encouraged companies to lever up. If earnings decline in a recession, that leverage increases.”
However, many SMDV components haven’t feasted on debt, at least not to a problematic point, and as a result, stand better prepared to weather a recession. Historical data indicate SMDV is positioned to perform less poorly during rough markets while delivering income for investors.
“But not all 2000 or so members of the index are created equal. The broad selloff presents an opportunity to invest in higher-quality and more-resilient small-caps at a discount,” Barron’s reports, citing BofA Securities equity strategists.
Dividend strategies can help mute the impact of volatility by giving investors a steady income stream in the event the markets do get bumpy as a result of unforeseen news events.
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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.