Small cap stocks have been outperforming for several months. Dividend-paying assets like the ProShares Russell 2000 Dividend Growers ETF (SMDV) are now getting in on the act.

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.

“Small-cap stocks have historically outperformed large caps after significant market declines like the one we saw in early 2020. According to Morningstar, while small caps have outperformed since the lows in late March, the rally thus far has been led by low-quality stocks—the stocks of companies in the lowest quintile of return on equity in the Russell 2000—a dynamic that may not be sustainable,” according to ProShares research.

Small cap companies can be big-time dividend offenders in tough times because they lack the large stores of cash to maintain payouts. However, SMDV’s dividend increase streak requirement shows that many of its components are well-capitalized.

The SMDV ETF Weeds Out Problematic Small Caps

Investors should focus on consistent dividend growers that have displayed strong characteristics over time and under a wide variety of market conditions.

SMDV’s dividend dependability is all the more important in a tougher dividend environment. Along with the focus on smaller companies, investors should also look to dividend growers to enhance long term returns.

“Quality small-cap dividend growers that have had stable earnings, solid fundamentals and records of profit and growth may be well positioned in a period of great uncertainty and attractively price,” adds ProShares.

SMDV 1 Year Performance

SMDV’s 10-year dividend increase streak mandate can also be a sign that member firms aren’t carrying heavy debt loads. While leverage remains a key challenge for these smaller companies, many of SMDV’s components carry stronger balance sheets than small cap companies that aren’t dividend payers.

SMDV, which yields 2.10%, is up 6% to start 2021.

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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.