Dividends have been a hot investment in 2022, a trend that looks to carry into 2023 as recession risk increases under an aggressive Federal Reserve monetary policy. Small-caps have been attractively priced for much of 2022 and on a trend-following basis, some opportunities exist within small-cap dividend funds right now.
Investing in dividend-paying companies offers several benefits to portfolios in economic downturns and recessions:
- Dividend payouts can offer the potential of more stability than stock price fluctuations.
- The income from dividends can help offset stock market losses.
- They are generally one of the last places a company looks to cut when it is slimming down.
Dividend-paying companies are also generally well-established companies that are better positioned to weather challenging economic and market conditions, making them an attractive buy this year during prolonged market volatility and uncertainty and economic slowing.
“Companies that have stable cash flow generation and are able to maintain and grow their dividends during times of market uncertainty are in high demand,” said Todd Rosenbluth, head of research at VettaFi.
For advisors and investors looking for a quality-screened dividend fund within small caps, the WisdomTree US SmallCap Quality Dividend Growth Fund (DGRS) is worth consideration. The fund has recently crossed above its 200-day simple moving average, a signal to buy for trend-followers, and has been above its 50-day SMA since the end of October.
DGRS invests in small-cap U.S. equity companies that pay dividends and display growth characteristics and applies a quality and growth screen to securities.
“With persistent economic uncertainty expected in 2023 as the Federal Reserve seeks to gradually adjust the rate-hiking program, advisors are likely to seek out the relative stability of dividend-paying companies. Small-cap focused DGRS provides a higher quality alternative to market-cap weighted index-based funds,” Rosenbluth said.
The fund seeks to track the WisdomTree U.S. SmallCap Quality Dividend Growth Index, a fundamentally weighted index based on dividend projections for the next year that screens U.S. small-cap companies for long-term earnings growth expectations, return on equity, and return on assets.
DGRS has an expense ratio of 0.38%.
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