Benchmark small-cap indexes, including the Russell 2000 and the S&P SmallCap 600, are not known for high dividend yields, but small-caps and the corresponding exchange traded funds are starting to become solid sources of dividend growth.
“From the end of 2013 there has been a 10.2% increase in the number of issues paying a dividend in the S&P SmallCap 600,” according to S&P Dow Jones Indices.
The $16.1 billion iShares Core S&P Small-Cap ETF (IJR) tracks the S&P SmallCap 600. IJR’s trailing 12-month yield is just 1.2%, or 75 basis points below 10-year Treasurys. More importantly, IJR’s dividend has the potential for significant growth in the coming years.
As S&P Dow Jones Indices notes, companies initiating dividends typically only do so if they intend to keep paying a dividend in the near future.From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research. [Dividend Growth Via ETFs]
Although small-cap indexes remain at the low end of the dividend yield totem pole, more than half of IJR’s holdings are dividend payers and there is room for steady payout growth as “182 payers have a dividend rate less than 50% of their 12 month net GAAP income, with 235 being less than 75%,” according to S&P Dow Jones Indices.
“Starting with recent growth in SmallCap payers, and the history of payers to continue to pay and increase, SmallCaps issues appear to be trending up, and if the trend continues, eventually, the index level characterizes will change,” said S&P Dow Jones Indices senior index analyst Howard Silverblatt in a note.
Some ETFs emphasize small-cap dividend growth, including the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS) . DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index, which is weighed by fundamental factors such as growth expectations, return on equity and return on assets, according to WisdomTree.
DGRS allocates 21.3% of its weight to consumer discretionary names and 13.9% to financials, the two sectors expected to post double-digit dividend growth this year. [Different Dividend ETF Ideas]
DGRS, which debuted in July 2013 and has a distribution yield of 1%, yields slightly less than the Russell 2000 and has offered modest out-performance of the benchmark small-cap index over the past year underscoring the notion that dividends are advantageous with small-caps, particularly at times when smaller stocks are out of favor. [Even More Monthly Dividend ETFs]