When income investors think of dividend stocks, more often than not, those thoughts focus on large- and mega-cap names, but dividend hunters should not sleep on smaller stocks. More than half of the members of the S&P SmallCap 600 Index are dividend payers, a percentage that has steadily increased in recent years.
Add to that, some of those companies have dividend increase spanning 10 years, while a smaller number have boosted payouts every year for more than two decades.
The WisdomTree SmallCap Dividend Fund (ETF) (NYSE: DES) does not track the S&P SmallCap 600 or a related index, but the $1.1 billion DES is, arguably, the most venerable name among exchange-traded funds holding small-cap stocks while offering the dividend twist. Nearly a decade old, it can be said DES was ahead of the small-cap dividend curve.
A Closer Look At DES
DES offers a surprising yield advantage considering it is a small-cap fund. According to WisdomTree data current as of December 31, 2015, DES yielded over 4 percent while the Russell 2000 checked in with a yield of just under 1.7 percent.
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“We feel that investors typically have a large-cap bias when it comes to income as well as in their general portfolio allocation decisions. We believe that mid- and small-cap dividend payers offer a further set of exposures beyond traditional large caps and can potentially lower portfolio risk and enhance returns through these diversification benefits. Moreover, the stocks themselves tend to display different characteristics than large-cap stocks,” said WisdomTree in a recent research piece.
Allocations And Advantages
DES does offer some sector-level perks. For example, the ETF's healthcare allocation is just 3.6 percent, indicating a retrenchment in biotech stocks would basically be a non-event for the fund. Additionally, small-cap energy stocks have been among that downtrodden sector's worst offenders, but that group is less than 3.8 percent of DES's weight. Only healthcare and telecom stocks garner a smaller weight in the fund.
DES has some other advantages. Notably, it charges just 0.38 percent per year in fees, which is about 100 basis points less than the average actively managed small-cap growth fund. Plus, DES is not saddled with the long-term track record of mediocre (or worse) performance as are many actively managed small-cap mutual funds.
“Mid- and small-cap stocks have traditionally outperformed large-cap stocks over long periods. This outperformance is typically a result of the higher growth potential of mid- and small-cap companies, but it also is usually associated with greater risks due to the volatility in earnings and uncertainty about new or unproven business models,” added WisdomTree.
Since inception, DES's underlying index has outperform major small-cap and small-cap value rivals.
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