Investors understand very well the virtues of dividends. Current income investing in dividends specifically has proven to be a leading theme over an up-and-down 12 months. Quality small caps offer one intriguing source of dividends right now, but what kind of firms fall into that category? Advisors can find several industries represented therein in a strategy like the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM).
First off, however, why look at quality small-cap dividends in the first place? They can offer needed ballast amid volatility, for one thing. That current income already helps portfolios significantly, but when sourced from high-quality, nimble small firms, they really shine. Using VettaFi’s ETF Database, investors and advisors can look at a few of the key names in OUSM for a set of examples and see how it compares to strategies like the Vanguard Small Cap Value ETF (VBR).
Digging Into Quality Small Caps
How does OUSM screen for quality? The strategy reweights the S-Network U.S. Equity Mid/Small-Cap 2500 index based on four factors. It considers quality based on EBITDA and financial metrics ROA and low volatility based on trailing five-year weekly volatility. OUSM also assesses dividend yield on a 12-month trailing basis and dividend quality based on payout and cash dividend growth.
So what meets the cutoff? OUSM provides a few strong examples, starting with Lincoln Electric (LECO). LECO provides welding equipment for American and global firms, and is currently riding robust technical indicator momentum. The firm’s $173 stock price sits well above both its $165 and $152 50 and 200-day Simple Moving Averages (SMAs) respectively. LECO generated $3.8 billion in 2022 sales with a 21.9 P/E ratio and 16.7% diluted 5-year EPS growth, per YCharts.
OUSM weights LECO at 2.4%, and weights American water heater and boilermakers A.O. Smith (AOS) at 2.3%. AOS’s price sits just below its 50-day SMA but well above its 200-day SMA, with its shorter term metric above the latter measure. AOS has seen lower EPS diluted growth over five years but is up on a quarterly, YoY basis by 10.5%. It also has a 42.6 P/E ratio to offer.
The pair stand out as just two of the quality small caps available in OUSM. LECO offers a 1.5% forward dividend yield, while AOS has a 1.8% forward dividend yield. Altogether, OUSM has outperformed its ETF Database Category Average and its Factset Segment Average YTD, returning 2.6%. OUSM also currently offers a 2% dividend yield itself, adding $21.8 million in one month net inflows.
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