7 Small-Cap Dividend ETFs To Buy For Big Income

| February 22, 2018

These small-cap ETFs can deliver big dividends and payout growth

For years, many investors did not associate small-cap stocks with dividends. Even today, the Russell 2000 Index and the S&P SmallCap 600 Index, two of the most widely followed gauges of U.S. smaller companies, yield an average of 1.2% on a trailing 12-month basis.

That is well below the yield on the large-cap S&P 500 and less than half the yield on significantly less volatile 10-year Treausries. On the bright side, the dividend profile of U.S. small-cap has improved considerably in recent years.

In fact, some members of the S&P SmallCap 600 have dividend increase streaks that can be measured in decades. Additionally, small-cap stocks that pay and grow dividends are, historically, less volatile than their non-dividend counterparts.

Investors looking to add some income to their small-cap allocations have some compelling exchange-traded funds (ETFs) to consider. Here are seven small-cap dividend ETFs to buy.

Dividend ETFs to Buy: O’Shares FTSE Russell US Small Cap Quality Dividend ETF (OUSM)

Expense Ratio: 0.48% per year, or $48 annually per $10,000 invested

The O’Shares FTSE Russell US Small Cap Quality Dividend ETF (NYSEARCA:OUSM) tracks the FTSE USA Small Cap Qual/Vol/Yield 3% Capped Factor Index, which features small-cap dividend payers “exhibiting high quality, low volatility and high dividend yields,” according to O’Shares.

While OUSM does hold some high yielders, its emphasis on the low volatility and quality factors steers investors away from high dividend stocks that recently experienced dramatic price declines, which can often be a sign of looming negative dividend action with high-yielding stocks. OUSM’s trailing 12-month yield of 1.53% is not alarmingly high and it is better than what investors find on standard small-cap benchmarks.

This small-cap dividend ETF holds over 300 stocks, but it is concentrated at the sector level with real estate, industrial and consumer discretionary names combining for over 55% of its weight. Investors are embracing OUSM. This small-cap dividend ETF is just 14 months old and already has $121 million in assets under management.

Dividend ETFs to Buy: WisdomTree U.S. SmallCap Dividend Fund (DES)

Expense Ratio: 0.38%

With a track record approaching 12 years, the WisdomTree U.S. SmallCap Dividend Fund (NYSEARCA:DES) is the oldest U.S. small-cap dividend ETF on the market. While age is not the most important factor in selecting small-cap dividend ETFs to buy, the long track record sported by DES helps show investors how small-cap dividend payers perform across multiple market settings.

The results are compelling. Since the start of the current U.S. bull market, DES has a compound annual growth rate that is 180 basis points ahead of the Russell 2000 with lower volatility than the small-cap benchmark. Additionally, the worst maximum drawdown seen by DES over that span is significantly below that of the Russell 2000.

DES weighs its more than 700 components by dividends paid. Consumer discretionary and industrial names combine for over 40% of this small-cap dividend ETF’s weight.

Dividend ETFs to Buy: ProShares Russell 2000 Dividend Growers ETF (SMDV)

Expense Ratio: 0.40%

For investors that like dividend ETFs that seek dividend growth consistency, the ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) is an idea to consider. This dividend ETF tracks the Russell 2000 Dividend Growth Index, a benchmark that requires at least 10 years of dividend increases for admittance.

By virtue of that dividend increase streak requirement, SMDV’s roster is smaller than standard small-cap strategies with just 59 holdings and 43.5% of those stocks hail from just two sectors — utilities and financial services.

Still, it is hard to knock SMDV. From the time the ETF debuted in February 2015 through the end of 2017, SMDV topped the Russell 2000 by 320 basis points.

Dividend ETFs to Buy: PowerShares High Yield Equity Dividend Achievers Portfolio (PEY)

Expense Ratio: 0.54%

The PowerShares High Yield Equity Dividend Achievers Portfolio (NASDAQ:PEY) is not a dedicated small-cap ETF, but large-caps represent less than 42% of PEY’s weight with mid- and small-caps accounting for the rest of the fund’s lineup.

This dividend ETF has a 12-month distribution rate of 3.34%, proving its chops as a yield play, but PEY’s index, the NASDAQ US Dividend Achievers Index, also requires that components have dividend increase streaks of at least a decade.

PEY devotes over 21% of its weight to utilities stocks, but it has some cyclical credentials as the financial services, consumer discretionary and energy sectors combine for over 42% of the fund’s weight. This fund also pays its dividend on a monthly basis, which is useful for investors seeking a steady income stream.

Dividend ETFs to Buy: WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS)

Expense Ratio: 0.38%

Knowing that a small-cap stock pays a dividend is one thing. Trying to identify the legitimate sources of small-cap dividend growth is another task altogether. The WisdomTree U.S. SmallCap Quality Dividend Growth Fund (NASDAQ:DGRS) helps with that objective.

DGRS follows the WisdomTree U.S. SmallCap Quality Dividend Growth Index, which is rooted in a combination of the growth and quality factors. The growth element “is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree.

Although DGRS is a dividend growth, not yield, strategy, its dividend yield of 2.49% on its underlying index is noteworthy. Most of the dividend ETFs highlighted here feature large weights to financials and/or utilities, but DGRS goes another way, allocating nearly half its weight to cyclical industrial and consumer discretionary names.

Over the past three years, DGRS has had slightly lower annualized volatility than the Russell 2000 and the S&P SmallCap 600.

Dividend ETFs to Buy: WisdomTree International SmallCap Dividend Fund (DLS)

Expense Ratio: 0.58%

The search for small-cap dividends need not be confined to U.S. borders. When applying the logic that foreign dividend payers usually feature higher yields than their U.S. counterparts, going abroad for some small-cap income makes sense. The WisdomTree International SmallCap Dividend Fund (NYSEARCA:DLS) helps with that mission.

Earlier, it was noted that small-cap dividend payers are usually less volatile than their non-dividend rivals. DLS confirms as much. Over the past three years, DLS has handily outperformed the Russell 2000, S&P SmallCap 600 and the large-cap MSCI EAFE Index, while being notably less volatile than all of those benchmarks.

DLS excludes small U.S. and Canadian companies, but features exposure to 23 countries, nearly all of which are developed markets. This small-cap dividend ETF yields 2.62%.

Dividend ETFs to Buy: PowerShares KBW Premium Yield Equity REIT Portfolio (KWBY)

Expense Ratio: 0.35%

Some small-cap dividend ETFs feature sizable allocations to real estate stocks while other funds in this category feature no real estate exposure. Investors without real estate exposure can take advantage of the high-yielding PowerShares KBW Premium Yield Equity REIT Portfolio (NASDAQ:KBWY).

KBWY has a 12-month distribution rate of 8.46%, well above what income investors will find on traditional real estate funds. While this dividend ETF has the capacity to hold mid-caps, its current portfolio is comprised entirely of small-caps, indicating that smaller real estate companies can provide investors with big income opportunities.

KBWY holds 30 stocks with an average market value of $1.99 billion, putting the fund at the upper end of the small-cap spectrum. This PowerShares ETF has outperformed several of its well-known large-cap rivals over the past three years, but KBWY has been more volatile than large-cap real estate ETFs over that period.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.


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Category: Small-Cap Stocks

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The author of this article is a contributor to InvestorPlace.com.