Income investors usually focus on large cap equities in the hunt for reliable dividends, but smaller stocks offer plenty of payout potential. The First Trust SMID Cap Rising Dividend Achievers ETF (NASDAQ: SDVY) is an exemplary case.

The First Trust SMID Cap Rising Dividend Achievers ETF follows the NASDAQ US Small Mid Cap Rising Dividend Achievers Index. That benchmark “is composed of the securities of 100 small- and mid-cap companies with a history of raising their dividends and exhibit the characteristics to continue to do so in the future,” according to First Trust.

SDVY’s high-quality focus may also help dividend growers outperform the broader markets during weaker periods. Dividends have been a powerful source of long-term returns. They have added significantly to returns over time, contributing approximately 32% of the S&P 500’s total return since 1960.

Investors may also note that the improved risk-adjusted returns over time are also found in the smaller segments of the companies with a consistent history of growing dividends.

SDVY 1 Year Performance

Inspecting the SDVY ETF

In today’s climate, SDVY’s quality perch, though perhaps surprising to some investors, is exceedingly meaningful.

Mid cap companies are slightly more diversified than their small cap peers, which allows many of them to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are often not so big that their size would slow down growth. Increased mergers and acquisitions activity could be just what mid caps need to catch up to large- and small-cap stocks.

Historical data indicate that even modest allocations to mid cap stocks can improve long-term returns compared to portfolios that don’t feature mid cap exposure.

Interestingly, some small- and mid-cap dividend stocks offer another advantage: solid management teams that are unlikely to take on leverage or make acquisition missteps for fear that they would need to cut payouts to compensate for those mistakes.

Adding to the case for SDVY is that dividend growth is a hallmark of quality. Component companies provide the best level of dividend growth, a legacy of stability and strength, and a history of weathering market turbulence.

That doesn’t mean SDVY will be perfect when it comes to avoiding dividend cuts, but it is a quality approach that advisors can deploy to steer clients away from a rash negative payout ratios.

SDVY allocates over 54% of its combined weight to financial services and industrial stocks.

For more on innovative portfolio ideas, visit our Nasdaq Portfolio Solutions 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.