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 (BATS: SMDV).
The ProShares Russell 2000 Dividend Growers ETF, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index. That index includes small-cap firms with dividend increase streaks of at least a decade. Index constituents are screened for liquidity and dividend status, then selected and equal weighted subject to a maximum sector weight of 30%.
Finding large-cap dividend payers with dividend increase streaks of at least 10 years is not difficult, but the task is somewhat more trying with smaller stocks, making SMDV’s roster arguably prestigious. By way of the dividend growth requirement, SMDV is small in terms of number components when compared to traditional broad market small-cap funds. SMDV has just 57 holdings, according to ProShares data.
The weighted average market value of SMDV’s holdings is $2.1 billion, putting the ETF at the upper end of small-cap territory. While SMDV allocates 29% of its weight to utilities stocks, more than any other sector, the ETF is not a high dividend fund, which is actually a noticeable advantage for investors.
“For example, investors seeking a greater-than-average income may choose high dividend yield strategies. But these strategies tend to have significant weightings in sectors that are highly sensitive to interest rate movements, thus introducing interest rate risk into the equity allocation,” said ProShares. “On the other hand, strategies focused on stocks that have grown their dividends consistently (but don’t always have the highest yields) may provide an all-weather dividend solution—one that has the potential to perform well regardless of the direction of rates.”
SMDV allocates almost 31% of its combined weight to financial services and industrial stocks and another 12% to consumer staples names.
“As investors consider dividend strategies, it’s important to note the difference between high dividend yield strategies and dividend growth strategies,” adds ProShares. “While the former may provide the higher income many investors crave, they tend to be sensitive to interest rate movements. The latter, on the other hand, offer all-weather potential, having performed well in a variety of interest rate environments.”
Another advantage of dividends married with small-caps is that small-cap dividend strategies have historically been less volatile than their non-dividend counterparts.
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