Trending
Roughly 75% of S&P 500 member firms pay dividends and while some of the index’s smaller components qualify as mid-cap stocks, few are legitimately small-caps and those that are often sent packing when the gauge rebalances.
Point is advisors and equity income investors can be forgiven if they’re among the many market participants confining their hunts for dividends to the universe of larger stocks. When the focus turns to payout growth, as it should, large-caps loom even larger. This is the world of companies such as American Express (NYSE: AXP), Coca-Cola (NYSE: KO) and Johnson & Johnson (NYSE: JNJ) that have payout increase streaks measured in decades.
More recently, tech titans such as Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT), among others, have availed themselves to be credible dividend growth stories. Add it all up and it’s not surprising that many advisors and investors aren’t thinking of dividends and small-caps at the same time. Perhaps they ought to be.
Small-Cap Dividend Prominence Rising
For advisors looking for an efficient avenue for gauging small-cap dividend opportunities, the Russell 2000® Dividend Growth Index is worth a look. That, which mandates that member firms increased payouts for at least 10 straight years, is the dividend offshoot of the widely followed Russell 2000 Index. The dividend benchmark has been a better long-term bet than its traditional counterpart.
“Over the 20 years ended November 2024, the Russell 2000 Dividend Growth Index achieved an annualised return 0.98% higher than the broader Russell 2000 Index,” notes Zoe Morrison of the London Stock Exchange Group.
As confirmed by the Russell 2000® Dividend Growth Index, small-cap dividend stocks offer one of the primary benefits associated with their larger rivals: they’re often less volatile than non-dividend counterparts.
“The Russell 2000 Dividend Growth Index represents the benefits of screening for small and liquid companies that pay consistently increasing dividends. The result is a small cap index with potential for higher returns, lower volatility, and lower drawdown risk relative to the broader Russell 2000 Index,” adds Morrison.
Her research points out that over a six-year rolling period, both the Russell 2000 Dividend Growth Index on a standalone basis and when combined with the Russell 2000 are less volatile than the Russell 2000 is on its own.
Best of Both Worlds
As advisors know, one of the primary reasons for allocating to small-caps is the potential for better long-term returns. That compensates for the volatility associated with the asset class. However, that advantage was largely erased in recent years as mega-cap growth stocks consistently led markets higher.
Still, it’s hard to ignore the point that smaller stocks, broadly speaking, can offer compelling return profiles. It also shouldn’t be ignored that for nearly three decades, the Russell 2000 Dividend Growth Index handily outperformed the parent gauge.
“The volatile markets over the past five years have attracted interest to dividend-paying companies due to their potential for stability, consistent income, and their ability to offer a hedge against inflation,” concludes Morriosn. “A small-cap dividend growth index, such as the Russell 2000 Dividend Growth Index, offers the dual advantage of exposure to dividend-paying stocks while still maximizing small-cap growth potential.”
The ProShares Russell 2000 Dividend Growers ETF (NYSE: SMDV) is the exchange traded fund linked to the Russell 2000 Dividend Growth Index.
Related: