Small-cap stocks and exchange-traded funds are usually thought of as avenues for growth, not income by way of dividends. That notion is affirmed by the relatively low dividend yields found on widely followed small-cap benchmarks.
Both small-cap benchmarks yield nearly 20 basis less than 10-year U.S. Treasurys. However, there are some positive dividend trends among small caps. At the end of the second quarter, 51.4% of the members of the S&P SmallCap 600 were dividend payers, according to S&P Dow Jones Indices.
The stumbling block for small-cap stocks in terms of dividend growth, as it has been for large caps, is negative dividend action out of the energy sector. Dating back to last year, the energy sector has delivered more negative dividend action than any other group in the S&P 500 Index. That trend is weighing on small caps as well as S&P data show a spate of recent dividend cuts or suspensions among energy small-cap stocks.
Fortunately, there are some small-cap ETFs investors can depend on for consistent dividends while gaining access to the potential for small-cap dividend growth.
Small-Cap Stocks: ProShares Russell 2000 Dividend Growers (SMDV)
Expenses: 0.4% per year, or $40 per $10,000 invested.
30-Day SEC Yield: 2.06%
The ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) hails from the same family of dividend growth ETFs as the popular ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL). Whereas NOBL mandates that its holdings have minimum dividend increase streaks of 25 consecutive years, SMDV’s mandate is just 10 years of consecutive dividend increases.
That is still pretty stringent among small-cap stocks. As of May 31, SMDV was home to 56 members of the Russell 2000 that met the decade of higher dividends requirement. SMDV’s trailing 12-month dividend yield of just under 1.5% isn’t jaw dropping, but it is pretty solid in the small-cap universe. Additionally, SMDV’s dividend yield is about 20 basis points higher than what investors will find on a traditional Russell 2000 ETF.
ProShares notes that dividend growers historically outperform stocks that do not boost payouts. Although SMDV is not old (the ETF debuted in February 2015), it has gained nearly 20% since coming to market while the Russell 2000 is flat over the same period. Year-to-date, the gap between the two small-cap offerings is wide as SMDV is higher by 16.4%, a performance that is more than two and a half times better than that of the Russell 2000.
Included among SMDV’s 56 holdings are small caps such as Chesapeake Utilities Corporation (NYSE:CPK), Franklin Electric Co. (NASDAQ:FELE) and International Speedway Corp (NASDAQ:ISCA). Small-cap financial services and utilities names combine for over 37% of SMDV’s weight.
Small-Cap Stocks: Guggenheim S&P SmallCap 600 PureValue ETF (RZV)
Expense ratio: 0.35% per year
Dividend Yield: 0.68%
As its name implies, the Rydex S&P SmallCap 600 Pure Value ETF (NYSEARCA:RZV) is a small-cap ETF, but it is not a dedicated dividend ETF. That is alright because the combination of small-cap stocks and the value factor not only can yield some decent dividends, but stellar long-term returns as well.
RZV proves as much. Since the start of the current bull market on March 10, 2009, RZV has put up one of the best-performances of any ETF of all stripes. The Guggenheim small-cap offering is higher by 500% over that period, more than double that S&P 500’s performance over that stretch and nearly double the Russell 2000.
RZV, which tracks the S&P SmallCap 600 Pure Value Index, currently yields less than 1%, but the benefit there is that the ETF’s low yield, even by small-cap standards, implies room for payout growth. Plus, RZV’s weight to high-yielding sectors, such consumer staples, telecom and utilities, is low, indicating that this small-cap ETF can be paired with a traditional dividend ETF like the aforementioned SMDV.
RZV devotes about 44% of its combined weight to consumer discretionary and industrial names.
Small-Cap Stocks: WisdomTree SmallCap Dividend Fund (ETF) (DES)
Expense Ratio: 0.38% annually
30-Day SEC Yield: 3.34%
The WisdomTree SmallCap Dividend Fund (ETF) (NYSEARCA:DES) is seasoned veteran of small-cap dividend ETFs. DES, which recently celebrated its tenth anniversary, is home to more than $1.4 billion in assets under management. More importantly, this small-caps dividend ETF yields 3.46%, which is well above non-dividend small-cap benchmarks and more than double 10-year Treasurys.
DES follows the WisdomTree SmallCap Dividend Index, which is a departure from ordinary small-cap indexes in that it is dividend-weighted. DES’s emphasis on cash dividends helps mute the ETF’s volatility compared to other small-cap indexes. For example, over the past three years, DES has been 200 basis points less volatile than the Russell 2000 while outperforming the widely followed small-cap index by 1,030 basis points.
Financial services, industrial and consumer discretionary stocks combine for 58% of DES’s weight.
At the time of this writing, Todd Shriber did not own any of the aforementioned securities.