Dividend investors often focus on large-cap stocks when searching for higher yields and dividend growth, but some small-cap exchange traded funds provide exposure to smaller companies with solid histories of boosting payouts.

The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) is one of the leading ETFs for exposure to dividend-paying small caps. 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.

The current market environment may support the dividend growth outlook. A steady U.S. economy and the implementation of the corporate tax cuts allowed companies to grow earnings and free cash flow, which helped many accumulate record levels of cash on corporate balance sheets.

To start 2019, SMDV is trailing the Russell 2000, but the ProShares dividend fund is again proving to be less volatile than broader small-cap benchmarks. That was the case last year when SMDV performed significantly less poorly than the Russell 2000 while being noticeably less volatile.

Russell 2000 Dividend Growth Index Data

The Russell 2000 Dividend Growth Index has typically experienced pulled back less during market crashes while still participating in rallies, which have helped the index experience significant outperformance over full market cycles, with less volatility in between. Specifically, the Russell 2000 Dividend Growth Index showed a 12.4% return with an annualized volatility of 15.1% for the period of June 1998 through July 2018, compared to the 8.8% return of the parent Russell 2000 Index with an annualized volatility of 19.4%.

SMDV was also less volatile than the S&P 500 last year. SMDV yields 1.98%, or almost 60 basis points above the yield on the Russell 2000.

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