Small-cap stocks are often prized for growth prospects, but with that quest for growth comes volatility. Investors can mute some of that turbulence by combining dividends with smaller stocks via the ProShares Russell 2000 Dividend Growers ETF (CBOE: 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. The ProShares ETF is one of the highest rated funds in the small-cap value category.

“While small-cap companies can present dynamic, appealing investment opportunities, it’s hard for investors to access them,” reports Brady Fletcher for Barron’s. “One of the most notable barriers is lack of coverage: Small caps don’t have access to the level of detailed reporting and third-party analysis large enterprises do. Smaller companies also often lack the resources to develop a strong online presence.”

SMDV offers investors a higher dividend yield than is found on basic small-cap benchmarks, such as the Russell 2000 Index. Additionally, dividend growth is a quality trait, which can help investors reduce some of the volatility associated with owning small companies. Data confirm that institutional investors are diving into small caps.

Small-cap for Big Returns?

“Small-cap companies aren’t typically the first investment vehicle that comes to mind for big returns, but it might be time to shift that mindset. Every large company is living proof of the potential growth of small businesses,” according to Barron’s.

Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.

By focusing on companies that have consistently increased dividends every year for the past decade, the Russell 2000 Dividend Growth Index avoids the so-called yield trap where a stock can have a high dividend yield following a steep decline in price.

Up 10.69% year-to-date, SMDV’s dividend yield of 1.91% is about 70 basis points higher than that of the Russell 2000.

For more on core investing strategies, please visit our Core ETF Channel.

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.

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